Monro Inc (MNRO) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake's earnings conference call for the first quarter of fiscal 2017.

(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.

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 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; 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 for this morning's call from management are John Van Heel, President and Chief Executive Officer; Cathy D'Amico, Chief Financial Officer; Brian D'Ambrosia, Chief Accounting 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 first quarter 2017 performance. I'll start today with a review of our results, our growth strategy, outlook for fiscal 2017 and comment on a recent Short Report on our Company. Then I'll turn the call over to Cathy D'Amico, our Chief Financial Officer, and Brian D'Ambrosia, our Chief Accounting Officer, who will provide additional details on our financial results.

Many of you have spoken to Brian over his tenure with Monro. Brian's participation on our call this morning and on future calls reinforces the fact that, as amazing as she is, Cathy doesn't do it alone. Brian has worked closely with Cathy over the last four years as part of our plan for developing our future finance function and its leadership, and I am pleased he is with us today.

Now, on to our results. Our first quarter results reflect the difficult consumer spending environment that we signaled on our last earnings call. Nevertheless, our focus on margins, cost control and the successful integration of our acquisitions produce earnings per share at the higher end of our guidance range. As we have done historically in similar challenging operating environments, we are aggressively managing our business and leveraging our natural business hedge through the pursuit and completion of multiple acquisition opportunities.

The trend in comparable store sales improved as we moved through the quarter from a decline of 9% in April to 7% in May and 5% in June. May and June are adjusted for the Memorial Day calendar shift. This resulted in a decline of 6.9% in comparable store sales for the quarter. July comparable store sales were negative 4.8%, slightly improved from June results.

Turning to our sales by category for the quarter, we continue to see consumers defer large-ticket purchases as tire comparable stores sales declined 3%, reflecting lower average ticket of 1% and a decline in units of 2%. Importantly, tire sales also improved as we moved through the quarter, with comparable store tire sales for the last two months of negative 1%, reflecting lower unit.

Turning to our service and repair categories, we experienced a pullback in consumer spending, including brakes and alignment, following two combined years of strong comparable store sales performance in both categories, which were up 8% and 16%, respectively, in the first quarters of the prior two years combined, as well as declines in the more discretionary services such as maintenance, front end shocks and exhaust. In addition to a choppy consumer spending environment, we believe these results are partially due to the lingering effects of a mild winter.

This is supported by the continued disparity in our geographic performance. Similar to the back half of fiscal 2016, our first quarter results continued to reflect the relative outperformance of our

Southern markets compared to our Northern markets. While comparable store sales in our Southern markets were down slightly for the quarter, comps in the South were positive in June and July.

Nevertheless, the weaker trends we are seeing in our business are the same trends that competitors in Northern markets we are looking to acquire are experiencing. Therefore, we believe we are maintaining our market share and driving more dollars to the bottom line than our competitors.

Last year, I spoke to you about our efforts to further integrate technology into our customer value proposition, specifically into our customer interaction, feedback and marketing activities. These improvements centered around website enhancement, email collection, increasing the number of customer reviews that we capture and subsequently use to help our digital search ranking and improvements in our online appointment process.

Our efforts led to an increase in online appointments of 10% in fiscal 2016, which contributed to the 1% traffic increase we achieved for that same year. Additionally, this year we are providing our store-level staff with more tools to drive traffic, sales, customer loyalty and achieve greater levels of efficiency.

Some of these include improved communication with customers through email and text directly from our stores, expanded automation of billing from national and fleet account business, further improvements to our online appointment process, online ordering of parts and tires, a slew of efficiency-related store improvements, including online credit card applications, payment clearance and electronic forms, increasing training and sales support videos, and, lastly, improved use of customer feedback and reviews, both in search engine marketing and on our website.

With regard to customer reviews, I believe we can do a significantly better job of marketing the over 120,000 reviews we receive annually directly from our customers. We ask our customers to provide us with feedback after each service, and we take pride in the fact that our customer approval scores are 94% in areas that are of particular importance to them.

These are (1) providing a thorough explanation of required work; (2) getting the job done right the first time; and (3) getting the job done on time. And with these scores it's no wonder that our overall rating on those 120,000 customer reviews we receive annually is 4.5 out of 5. That translates to, on average, 120 reviews per store per year.

We believe that more prospective customers need to see these scores. As a result, we are expanding the display of these customer reviews on our website's local store pages and in search engine marketing. We believe these changes will help more customers find us and select our stores for their automotive service and tire needs.

Also, we're working to increase the number of reviews left online by our customers on sites such as Google, Yelp and others. For our 1,000-plus company-operated stores, an average of only 19 reviews per store have accumulated over the past 12 years on these review sites, with an average rating of 3.1 out of 5. For the June quarter our average rating was 3.4 out of 5.

But it is important to highlight that this represents less than two reviews per store per year from all the major review sites combined, versus the 120 average reviews per store we receive every year directly from customers. We are working on getting more of our customers to post their candid reviews online to better reflect our 94% approval rating on key customer service attributes and our overall satisfaction score of 4.5 out of 5.

We recognize the importance of developing trust with customers in our high-service, low-trust business, and have made that an integral part of our culture. It starts with the building block of our business, our low-cost, high-value oil changes, which build customer loyalty and lead to follow-on services and tires.

As a part of our commitment to our customers, we strive for continuous improvement in the quality of our work and in our customer engagement. This includes promoting technician certification and ongoing sales and management training. We monitor our performance with regular store phone shops, customer satisfaction surveys, frequent customer follow-up calls and a well-coordinated system of customer service support.

Providing excellent customer service is also tied into our employees' compensation structure. That said, we can do better. The good news is we have many opportunities to make further improvements in the areas of customer engagement and customer-facing technology over the next several years, which I believe will benefit our traffic and sales.

Let me now provide you with additional details on our growth strategy. As previously announced, in the first quarter we completed the acquisition of 29 McGee Auto Service and Tires 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 more than 5% annualized sales growth. The acquisitions represent the sales mix of 40% service and 60% tires and is expected to be breakeven on earnings per share in fiscal 2017.

Importantly, the McGee 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 86 stores extending across both coasts, representing approximately $118 million in annualized sales, or just over 12% of total company sales.

As a reminder, since we do not have company-operated distribution fully servicing Florida and Georgia, we are not achieving the supply chain efficiencies we otherwise would. As we near 100 stores 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.

Importantly, while McGee's business is two-thirds retail, it also includes a larger commercial component than other businesses we have previously acquired. We are working to grow this component of our business first in Florida, as we believe it is complementary to our retail business, and when combined with our overall scale and relationships with tire suppliers, will lead to significant savings on material costs in that business as well as additional sales opportunities.

We believe there are also opportunities to expand the commercial business throughout the remaining 25 states we operate in. As many of you are aware, most of the leading commercial viewers also operate some number of retail stores, so we view this opportunity as not only important but a natural extension of our proven retail focus consolidation strategy.

I'm also pleased to announce today that we have signed definitive agreements to acquire additional stores within our existing footprint, with annualized sales of approximately $40 million. We expect these transactions to close in the September quarter and to be breakeven to slightly dilutive in fiscal 2017. Combined, the Company's completed and announced acquisitions fiscal year to date add approximately $90 million in annualized sales, representing 10% annualized sales growth in just the first four months of fiscal 2017.

This quarter and the past fiscal year are stark examples of the choppiness in consumer spending facing our industry and our geography. With our superior scale and advanced supply chain, this environment does and will continue to weigh more heavily on smaller dealers, and I believe this will create more acquisition opportunities than we have seen in many years.

This is underscored by the more than 10 NDAs we currently have signed. Each of these NDAs represents between 5 and 40 locations, all within existing markets. Additionally, our $600 million revolving credit facility allows us to increase the number and size of acquisitions we can pursue going forward.

As discussed with you last quarter, the start of fiscal 2017 reminds me of what we experienced at the beginning of fiscal 2013, with a few important differences. Both years had slow starts, with weak consumer spending and unseasonable weather, impacting sales across categories in Northern markets. Both had $50 million in annualized acquisition growth completed early in the fiscal year, along with a strong acquisition pipeline, and both years faced potential of future tax hikes and economic uncertainty.

Importantly, under these market conditions fiscal 2013 delivered 25% in annualized sales growth through acquisitions that have since driven a significant portion of the greater than 50% increase in earnings we've achieved over the last three years. I would also like to highlight the important differences between these two periods.

(1) We are a significantly larger company, with growing exposure to Southern markets. (2) We believe we are now late in an elevated customer deferral cycle, with an increasing number of vehicles on the road. (3) We have a credit facility more than double what it was four years ago. And, lastly, we continue to expect material costs will decline this year, providing a meaningful offset against any continuing sales pressure.

Fiscal 2017 has been a strong year for acquisitions compared to our target of 10% annualized sales growth. However, it may exceed our expectations and significantly leverage the great hedge in our business model, the ability to grow the business at an accelerated pace during difficult environments. If we could achieve anywhere near the 25% acquisition growth we completed in fiscal 2013, it would more than offset any short-term market impact on our business and drive profitable growth for many years to come.

As we've previously announced, we also expect to drive scale in our business through an increase in the number of greenfield stores opening this fiscal year. We are targeting 20 to 40 greenfield locations in fiscal 2017, seven of which have opened in the first quarter. We expect another six to eight in our second quarter.

The majority of these stores will fill in current markets through the purchase of one to three store businesses. Overall, we should see more attractive 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. We also believe they represent a source of potential upside for our full-year estimate.

Now let's turn to the details of our outlook. As we have discussed, our primary concern remains the consumer as they face higher healthcare costs, particularly as wages remain stagnant and the Northeast underperforms the rest of the country. That being said, we expect the sales environment to improve through the second quarter as consumers begin to satisfy these higher healthcare deductibles and the impact of a mild winter on our Northern markets dissipates.

Based on these factors, we expect second quarter comparable store sales to decrease 2% to 5% versus the prior year, in line with the guidance we provided on our last call. We anticipate total sales for the second quarter to be in the range of $245 million to $255 million, reflecting the comparable store sales guidance and contribution from our recent acquisitions.

We expect second quarter diluted earnings per share to be in the range of $0.53 to $0.58, versus $0.57 last year. We are raising our fiscal 2017 sales guidance to a range of $1 billion to $1.03 billion versus our previous guidance of $980 million to $1.01 billion.

This reflects the fiscal 2017 completed and announced acquisition and also assumes comparable store sales of flat to negative 2%, unchanged from our initial guidance and in line with the flat comparable store sales in fiscal 2016. Our sales outlook also reflects our expectation for comparable store sales to turn positive in the second half of the year as we lap easier comparisons from the lack of winter weather last year in our markets.

Turning to our expectations for cost of goods sold, 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. We have shifted the vast majority of our non-branded tire sourcing to suppliers outside of China, thereby minimizing the impact of the Chinese tariff. Looking ahead, we expect that our competitive cost advantage will widen even further as many smaller dealers will face higher costs, which we've been able to mitigate through our increasing scale and the flexible supply chain.

Turning to SG&A, it is clear by the relatively flat operating expenses we reported for the June quarter, despite operating 65 net new stores, that we are laser focused on cost control. Taking into account lower tire and other material cost anticipated in fiscal 2017, we expect to generate operating leverage on comparable store sales above flat this fiscal year. Remember that every 1% in comparable store sales generates an incremental $0.07 of EPS.

Based on these assumptions, we continue to expect fiscal 2017 diluted earnings per share to be in the range of $2.05 to $2.20, versus $2 per share in fiscal 2016. The guidance includes a 14% to 16% contribution from recent acquisitions, and is based on $33.4 million diluted weighted average shares outstanding. The midpoint of our fiscal 2017 earnings guidance represents flat operating margin with fiscal 2016 and EBITDA of approximately $172 million.

Despite the choppiness in our sales over the last three quarters, the long-term structural trends in our industry remain positive and continue to strengthen. Vehicles 13 years old and older accounted for nearly 30% of our traffic this quarter, up sequentially from last quarter. These vehicles continue to produce average tickets similar to our overall average, demonstrating that customers continue to invest and maintain their vehicles even as they advance in age.

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 from 2011 to 2015, representing a significant tailwind for our business. As you are aware, our corporate culture is not one of complacency.

Both our corporate staff and our employees in the field are committed to continuous improvement. This is evidenced in the initiatives I discussed today and our team's solid execution on acquisition opportunities. Thank you to all of our employees for making this possible and for their continued hard work and dedication.

Finally, some of you have called us to address a recently issued short report rating Monro's stock a sell. Let me spend five minutes on this so we can hopefully put it to bed. Here's what I know.

(1) This is the third sell rating I've seen since I've been with the Company. Once of these reports said our stock would be worth $22, another said $33, and now the most recent says $55. The author of this most recent report initiated Monro with a neutral rating when the stock was $35 in 2012 and subsequently changed his rating to sell when the stock hit $68.

Unlike the reports which preceded him, this report is the first to attack our store's execution to support the author's thesis as opposed to just being wrong on secular trends. Let's walk through some of the main points of this report.

Let's start with valuation, which is a fair question. However, one might ask that about the whole market. Our valuation, which is at or below the multiples of recent transactions, including (inaudible), Pep Boys, Midas and others, using real GAAP numbers, reflects our track record and competitive positioning.

That includes 19% compounded EPS growth over the past 17 years; the highest operating margins in the auto service entire industry by far; a defensive-in-nature and only pure play publicly traded service provider in the space, with structural competitive advantages starting with procurement of parts and tires; and a long runway for growth, backed by proven execution.

Let's move on to comparable store sales. We are not satisfied with our comps, and there is definitely room for improvement. I covered several of the initiatives we are pursuing to drive sales earlier in my remarks and commented on the favorable industry trends like the increasing number of vehicles in the six-plus age cohort over the next five years.

It is interesting, however, that the report, along with many of the questions we have been receiving lately, starts the analysis of our comps in the fourth quarter of fiscal 2011, which skips fiscal 2008 comp performance of plus 3.1%, 2009's plus 6.7%, 2010's plus 7.2% and fiscal 2011's positive 4.2%. We also ran positive comps from the period of fiscal 2002 to 2007, as well. After a long period of high comp outperformance in the service space, one might expect an extended deferral cycle to follow, exacerbated by weather anomalies.

We were also compared to parts retailers who don't sell tires, a high-ticket and volatile category. Additionally, the parts retailers cited have more dominant market share, and their growth is derived from the commercial side of their business. They also have a national footprint that has outperformed our concentration in the Northeast during this period.

Additionally, we cannibalize our own comps with our acquisitions, the majority of which fill in our current markets. We do not include acquired stores in the comp base for two years, which means that doubling store count in a market, creating No. 1 or No. 2 market share position as well as store density and operating leverage, has a potential negative effect on the comps of existing stores in those markets. For us, the bottom line still trumps the top line.

There was also no mention of service providers, who we significantly outperformed in sales, growth, operating margins, earnings per share and stock performance until they were sold or taken private. These include companies such as TBC, Midas, Pep Boys.

Another point I'd like to address relates to the report's analysis of our long-term targets. We have consistently said we will sacrifice sales growth for earnings. Unlike many competitors, including ones who are no longer public, we won't spend advertising or create our margins to drive comps in a bad market or overpay for acquisitions for the sake of growth.

The report also says we only hit our earnings growth target of 20% once in the last nine fiscal years but doesn't identify that target as EPS growth. We have always said EPS will be choppy, and the hedge in our business model will be the acceleration of acquisitions during difficult periods. As far as hitting our EPS growth target only one time since fiscal 2009, 2009 was plus 19%, 2010 was plus 34%, 2011 was plus 35%, 2012 was plus 17%, 2013 was down 22%, 2014 was up 27%, 2015 was up 13%, and 2016 fiscal year was up 6% in EPS and 10% when you add back the due diligence costs that we had for a deal we didn't complete.

As you can see, we've hit our goal more than one time. This period, which includes the worst year in our industry in forever, still represents 15% compound EPS growth, not as high as we want but a lot better than many other companies in a difficult period and is still part of the 17 years of 19% compound EPS growth.

The report also says we start to create organic operating leverage at a 2% to 2.5% comp. Over the last four years we've stated that because of our increasing scale we can leverage operating expenses on a comp of between minus 0.5% to positive 1%, and this year we told you we can leverage on anything above a flat comp.

Lastly, I would also like to address the point about our store experience. The report relies on Yelp reviews for a portion of our stores to make a negative case about our customer experience. This report spent three pages on these Yelp reviews. Yelp paints a highly inaccurate picture of our customer satisfaction.

Even so, if you consider the online reviews for all of our stores on all major review sites over the past 12 years, you get an average of two reviews per store per year, and the satisfaction ratings are 3.1 out of 5 and were 3.4 out of 5 for the quarter ended June, which are consistent with the competitors quoted in the report. On this item, the report is just wrong.

The truth is, we receive 120,000 independent reviews from our customers annually. That translates to an average of 120 reviews per store per year. Based on these reviews, when those overall satisfaction score is 4.5 out of 5.

The report is gracious enough, however, to suggest that dissatisfied customers are more likely to post reviews online. We agree. That said, we strive to do better every day.

As far as the report's comments on wages, benefits and employee turnover I'd like to give you the facts. Our turnover has been relatively consistent between 2002 and 2016. Turnover for the period from 2012 to 2016 actually trended lower than between 2002 to 2006, which was a period of positive comps, this despite integrating numerous and significant acquisitions, which tends to increase turnover rates. Additionally, we've said publicly that enacted increases to minimum wage will not have a significant impact on Monro.

Now -- let me now apologize for taking the extra time during this call to address this, but I thought it would be of value to have something on the record so we can talk about more important things in the future. The beauty of what we do is in two years we'll know who was right. I'm very confident that Monro will be a larger and even more profitable company then.

With that, I will now hand the call over to Cathy D'Amico and Brian D'Ambrosia for a review of our financial results. Cathy?

Thanks, John. Good morning, everybody.

Sales for the quarter increased 0.2% and about $0.4 million. New stores, which we define as stores that opened or acquired after March 28, 2015, added $18.5 million, including sales of $16.8 million from the fiscal 2016 and 2017 acquisitions. Comparable store sales decreased 6.9%, and there was a decrease in sales from closed stores of approximately $2.3 million. There were 90 selling days in both the current and prior year first quarters.

At June 25, 2016, the Company had 1,064 company-operated stores and 134 franchise locations, as compared with 999 company-operated stores and 146 franchise locations at June 27, 2015. During the quarter ended June 2016 we added 36 company-operated stores. We closed one company-operated store, and one franchise location closed during the quarter.

Gross profit for the quarter ended June 2016 was $98.1 million, or 41.4% of sales, as compared with $99.7 million, or 42.2% of sales, for the quarter ended June 2015. The decrease in gross profit for the quarter ended June 2016 as a percentage of sales is due to an increase in total material cost, including outside purchases, which increased as a percentage of sales as compared to the prior year.

This was largely due to a shift in mix from higher margin service categories to the lower margin tire category as well as the impact from acquisition. On a comparable-store basis, gross margin increased by 50 basis points, driven by lower material costs, primarily in tires and oil.

On a consolidated basis, labor cost increased slightly due to the impact of negative comparable store sales. Distribution and occupancy costs decreased moderately, largely due to distribution cost savings.

Operating expenses for the quarter ended June 2016 increased $0.7 million and were $66.8 million, or 28.2% of sales, as compared with $66.1 million, or 28% of sales for the quarter ended June 2015. The increase as a percentage of sales was primarily due to relatively fixed expense against lower comparable-store sales.

Before the loss on closed stores and amortization associated with acquired stores, the dollars spent on operating expenses actually decreased slightly as compared to the prior year, in spite of inflation and costs associated with a weighted average increase of 50 stores from the first quarter of last year. This demonstrates strong cost control in a period of soft sales.

Operating income for the quarter ended June 2016 of $31.3 million decreased by 6.9% as compared to operating income of approximately $33.6 million for the same quarter of last year and decreased as a percentage of sales from 14.2% to 13.2%.

Net interest expense for the quarter ended June 2016 at 1.9% of sales increased $1.1 million as compared to the same period last year, which was at 1.4% of sales.

The weighted average debt outstanding for the first quarter of fiscal 2017 increased by approximately $57 million as compared to the first quarter of last year. The increase is due to an increase in capital leased debt recorded in connection with the fiscal 2015 and fiscal 2017 acquisitions, as well as an increase in debt outstanding under our revolving credit facility to fund the purchase of the 2017 acquisition.

The weighted average interest rate also increased by approximately 50 basis points from the prior year, largely due to adding capital leases as well as an increase in LIBOR and prime rate versus the same time last year.

The effective tax rate was 37.9% of free tax income for the quarter ended June 2016 and 38% for the quarter ended June 2015.

Net income for the quarter ended -- for the current quarter of $16.8 million decreased 10.9% from net income for the quarter ended June 2015.

Earnings per share on a diluted basis of $0.50 decreased 12.3% as compared to last year's $0.57.

I will now turn the call over to Brian D'Ambrosia, who will review the balance sheet and cash flow for the quarter. Brian?

Thank you, Cathy.

Our balance sheet continues to be strong. Our current ratio at 1.1 to 1 is comparable to fiscal 2016. Inventory turns at June 2016 improved slightly as compared to year end and the first quarter of last year.

During this fiscal quarter we generated approximately $22 million of cash flow from operating activities and increased our debt under our revolver by approximately $38 million. Capital lease and financing obligations increased $15 million, due primarily to the accounting for our fiscal 2016 and fiscal 2017 acquisitions.

At the end of the fiscal quarter debt consisted of $141 million of outstanding revolver debt and $192 million of capital leases and financing obligations. As a result of the fiscal 2017 borrowings, our debt-to-capital ratio, including capital leases, increased to 38% at June 2016 from 34% at March 2016. Without capital and financing leases our debt-to-capital ratio was 20% at the end of June 2016 and 16% at March 2016.

Under our revolving credit facility we have $600 million that have 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 $441 million of availability, not counting the accordion.

We are fully compliant with all of our debt covenants and have plenty of room under our financial covenants to add additional debt for acquisitions without any issues. 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 the fiscal quarter we spent approximately $8 million on CapEx and $47 million on acquisitions. Depreciation and amortization totaled approximately $11 million, and we received $2 million from the exercise of stock options. We paid about $6 million in dividends.

This concludes our formal remarks on the financial statement, and with that we will now turn the call over to the operator for questions. Operator?

(Operator Instructions)

Bret Jordan, Jefferies & Co.

Could you talk about what the import versus the domestic mix in tires in the quarter were?

It was consistent with what we've seen in the past, high 30s, high 30% of sales units.

Okay. And then on the acquisition you talked, the to-be-closed acquisition, could you give us some color as to where that is regionally?

No.

Okay. All right. And then I guess from a --

We will certainly in due time, but we didn't describe it more for a reason.

Okay.

(Inaudible).

All right. And then on the quarter to date trends, you talked about the Southern markets coming back. Could you give us maybe some feeling on the quarter and then also quarter to date what the spread, the spread between strong market performance and weak market performance might be in comp?

Sure. It is -- for the quarter it's about 700 basis points.

Okay. And how is --

It's still ranging around $500 to $600.

Okay. And how is traffic versus the ticket on that in the quarter to date?

The traffic, our traffic was down four in the quarter.

Okay. Great. Thank you.

Rick Nelson, Stephens Inc.

John, the NDAs that you've got now in the pipeline. I guess we're at 10% growth already now through the four months. If you've got all of these closed, how much incremental revenue would be left?

Sure. The NDAs that we have are still about two years of annualized sales growth at 10%.

Thanks for that. Also, could we get comps by month, April, May June?

Yes, we said that April was down 9%, May was down --

7% adjusted for Memorial Day.

Right, right, down 7% adjusted for Memorial Day, and June was down 5%.

Okay, got it.

So down 9%, down 7%, down 5%.

And in July we got the numbers. So how do you get to positive comps for the year with the negative comps to date?

Well, if you recall, the last half of last year was very weak because we had no winter in our markets. Our tire units were down significantly in the second half of the year, like I believe down 600 basis points in the second six months. And I think with some more normalized weather and the consumer getting through these healthcare pressures that they have, we have that opportunity in the second half of the year.

We also for the year have said minus 2 to flat in our guidance. So we're not guiding to positive comps. I mean, I think that represents certainly an opportunity with the weak comps and lack of weather that we had last year.

Got you. And when do you think these digital initiatives are going to contribute?

Well, as I said, they have been contributing to traffic. I expect them to contribute throughout the year and accelerate in the second half as we get several of them implemented. And that is supportive of traffic and sales.

Got you. Do you think you're at a competitive disadvantage at all relative to the dealers with all the recall activity that they're doing?

You know, yes, I think the dealers try to take advantage of the recall activity, but as I've said before, I believe that our competitive advantages versus the dealer are significant, one of which is convenience from number of locations and hours, and the second is value. They're high priced, and especially in a market of stagnant wages consumers are sensitive to price, and I think they see more value in our overall offering. And I think that's defensible and that will continue for years.

Okay. Thanks a lot, and good luck.

Brian Nagel, Oppenheimer & Co.

Hi, this is David Bellinger on for Brian. You mentioned a combination of the weaker consumer environment and also the negative effect of the milder weather across certain markets. Is there any way you could break that out for us and just comment in terms of what's having a greater impact on your sales trend?

Yes, we said in the past that we thought in the first quarter was half and half. And a lot of that is given the disparity that we see in the comp trends between the Southern markets and the Northern markets. So that's what I see, and I expect that the weather impact will dissipate as we get further into the second quarter here, and the consumer should do better as they deal with things like healthcare deductibles.

Okay, then just switching gears on the acquisition front to the recent acquisitions you had in this quarter, have you seen any change in the multiples?

No, we said the multiples are consistent. To the extent that the smaller dealers are having a tougher time, especially in certain markets that are more pressured, that as their earnings go down the valuations go down and we get some help there.

Okay. Thanks for taking my questions.

Matt Fassler, Goldman Sachs.

I've got two questions. The first relates to gross margins. So, this was the first meaningful gross margin decline that you'd experienced in quite some time, and I know that it was up kind of pound for pound on a comparable basis, but I guess, then, the impact of the acquisitions to take it down was quite significant, especially relative to the acquisitions that you've booked over, say, the trailing 12-month period. So can you talk about what it was about those deals that would have weighed on gross margin to the degree that we saw?

Sure. Yes. A minus 7 comp was overcome within that. But, yes, the -- in terms of the deals that we've announced and certainly most recently the McGee deal does have a -- it's very early in that, so we got the worst part of it or the highest cost part of it. And so that weighs on it.

And it does have an element of commercial business which is lower margin generally, and certainly because it's new we've been conservative in accounting for the numbers for it. So I think that's really primarily the main issue.

And if you think about the comp store gross margin expansion that you put up, which I think was in the neighborhood of 50 basis points, if you think about the mix issues or the mix dynamics that you confronted with some of the weather factors that you faced, and then you also think about the consequences of the comp and the deleverage there, with the somewhat better comp that you're guiding to and whatever you see playing out in terms of your base case for weather, does that comp margin go up more than 50? I guess you have some nice tailwinds in the tire mix side, etc. And also does the drag from the acquisitions start to abate as you season some of these deals?

Yes. Yes to the second piece, and in terms of the abatement from the acquisition. And then on the first piece, we can certainly see some additional help above 50 basis points depending on what the pricing environment is for tires.

Like I said on our last call and noted here, we did have 1% lower ticket, or 100 basis points lower ticket on tires during the quarter. So I expect that to settle out, and in fact that did settle out by the end of the quarter.

Great. And then just a quick follow-up just looking at some of the multiyear category trends, if we look at the two-year and three-year comp stacks, and nothing has really broken out of that differently. I guess the shocks business seems like it's quite depressed for you, and brakes, I guess, moved into a deeper state of decline than you had seen on a one-year basis and also kind of on a multiyear basis. If you think about those categories and just think about their trajectory, whether it's market position, the state of those industries, the impact of the weather, are those businesses that will stay under pressure or do you see those coming back?

Well, let me make sure that we've got the numbers right. Over the last two years the front end shock category was down 2 on a stack for the year, for the 2 years, for the fiscal years. And for the fiscal years brakes was up 5 over the last 2 years. So brakes was up, not down.

Certainly, I mean, the impacts that we saw in the first quarter on the front end in shock side is absolutely tied to weather. When you don't have potholes, you don't have the weather, you're going to have less breakage there, and we're absolutely seeing that.

After running 2 years of plus 5 on the brake side, running down like we did in brakes is a consumer pullback. And, again, the 2-year stack on brakes was up 8, I believe, over the last 2 years first quarter, so there was a higher comparable there.

The reason I say brakes is consumer is that brakes is less deferrable than shocks, as well. Brakes is more of a -- is a safety issue. So you do have some consumers staying away and also seeing if they can't squeeze an extra oil change out of that set of brakes.

Got it. Okay. Thank you so much, John.

Nick Curcio, Evercore ISI.

Hey, guys. This is Mike Montani here. Just wanted to ask if I could, and apologize because I just jumped on late, but did you give the oil change numbers in the quarter yet?

I said that traffic was down 4 for the quarter, oil changes were down 200 basis points.

Okay. That's helpful, thanks. And I guess on a housekeeping front can you just do the revenue mix percentages that you guys usually give for the different lines of business?

Sure. Brakes was 15%, exhaust was 3%, steering was 10%, tires was 44%, and maintenance was 28%.

Okay. And then the other question I had was just on the labor front, and, again, if I missed this I apologize, but in terms of wage rates themselves, and then also in terms of the healthcare costs, can you just talk about kind of what you're seeing for your workforce and any plans to manage through those costs?

Yes, I did comment that our labor is really no change from what I've described in the past. From a healthcare standpoint, our employees, like most consumers, are seeing higher healthcare costs, and the Company is absolutely sharing in that, in most cost increases as costs go up. And that's all baked in within the numbers that we gave and the cost control that we have.

From a wage standpoint, we're competitive, and I did say that we had said in the past that the enacted minimum wage laws are not going to have a significant effect on us. So we -- it's really very consistent with what I've described in the past.

Okay. And I guess if I could just sneak in one more, which would be we've obviously seen sustained oil prices at a pretty low level. I know you all have some contracts I place. But can you talk about any potential cost saves there if and when those contracts are coming due?

And similarly on the tire side, is there still further rounds of goodness to go from here between the tariff and any other raw declines, or are we at a stage now where some of those are going to be given back?

Well, I said, consistent with our prior call, that our guidance for the year contemplates commodity costs where they are. We have had -- the materials phase that we've talked about year over year are in tires and in oil.

I'm glad to say that our oil contract is up next year, so we have another crack at our oil agreement. And both with tires and with oil, our increasing scale and our increasing volume from our acquisitions is going to continue to pay off in lower costs going forward. I expect it to.

Thanks.

Scott Stember, CL King & Associates.

Could you maybe talk about -- dig deep into the difference in the customer base in your Northern and Southern regions outside of weather? Maybe just talk about the economic profile a little bit better so we can get a little bit better understanding about how things like healthcare and the general economy could be impacting both.

I think the -- I think what you've seen generally is certainly a big piece of it is general -- the housing market, supporting the general economic activity in those areas as one of the big differences.

Okay, got you. And maybe just talk about alignment. I know that certainly bad weather, potholes, promotes alignment activity, but at least in previous quarters we've seen a little bit of a divergence between alignments and tire sales, and I guess part of it was because some folks might have been trying to extend the life of their tires. Can you maybe just talk about some of the relationships there that you're seeing, and where you would expect that to go going forward?

Yes, I think we've comped up over the last two years 15% in alignment. And I believe that was related to consumers trying to extend the life of their tires.

I just see the current results as consumer driven from the standpoint that consumers just pulled back in a way this last three months than they had previously. That to me is the biggest difference.

I don't know that I expect us to run plus 8 in alignments from here to eternity, either. But we've done a good job in the field. But the main piece is that the consumer just really pulled back.

Okay, got it. And last question --

And another big piece -- I'm sorry for interrupting -- is that fact that you brought up about that the fact that we coming off of the winter, we just didn't have the potholes and all of that to really drive a big piece of that business in these last three months.

Got it. And last question, maybe just talk about the greenfield strategy. It sounds -- I missed part of that talking about I think you said six to eight stores. Maybe just talk about how that manifested, and the thought process behind that.

Sure. As I've explained before, the same fundamental factor that is driving these smaller dealers, these chains that we're acquiring, to drive those acquisition opportunities, is relevant for the one-, two- or three-store guy, as well, and that is they're getting older and the operating environment isn't getting easier. So the idea behind this was really just to apply the same proven acquisition-oriented plan that -- to these smaller opportunities.

And I expect out of that to get better overall entry costs or purchase costs relative to the larger chains, and more leverage on us implementing our business model. So we said we're targeting between 20 and 40 of these for the year.

We opened seven in the first quarter. And we expect to open another six to eight in the second quarter. So we're well within that plan, and it's going very well. We've seen a good level of interest.

Got it. That's all I have. Thank you.

Brian Sponheimer, Gabelli & Company.

Hi, John. Filling in for Carolina here.

Sure.

You mentioned that your addressable population is going to be growing, but if I'm thinking back 8 to 10 years, or really 6 to 8 years, you got low new-unit years of 2008, 2009, 2010 and 2011 that are going to be -- those cars are going to be coming 7, 8, 9 years old. Isn't that necessarily a headwind for you as you kind of think about comps over the next few years since that's truly your sweet spot?

Yes, I mean, look, I think as you look back, again, we've had a lot of discussion about the last couple of year's comps, certainly what we've seen is a flattening out of the number of vehicles in operation over the last couple of years. And I did say that certainly going forward I see an increasing number of vehicles.

But I have said that looking -- if you look at these areas of that trough in new car sales it might correlate very well with the comp pressure that we've seen. But we've also seen a lower scrap rate over the last couple of years, and I would expect that to continue, and I think that the forecasts are for that to continue and for the car parks to grow and for the vehicles 6 plus to grow, both of which will be tailwinds for us going forward over the next 5 years.

Certainly. Well, that's it for me. Thank you very much.

James Albertine, Consumer Edge Research.

I wanted to ask a couple of things, and, look, I apologize, as well, I dialed on -- I dialed in a little bit late, so if it was in your prepared remarks, again, apologies in advance. But from a competitive standpoint you got one of your biggest (inaudible), but anything worth noting from a promotional or anything sort of competitively that's changed since that occurred?

No. I haven't seen anything significantly different. I think I said on our last call to a similar question that they're not driving the market.

Got it. Any appetite to -- and I don't want -- your methodology for growth has been truly stunning over the last 15 years, but given the extent of the deferred maintenance cycle and how bad comps have been more recently, would there be any sort of eagerness within management to drive growth faster by jumping out into newer markets?

So, in other words, you've kind of taken a market, you've grown very slowly around that market, and it's proven to be very effective. But is there an urgency to diversify as quickly as possible away from the Northeast. And is that something that could allow you to accelerate M&A in the near term?

Yes, I have absolutely said that our growth in the South is great because it reduces our concentration in the Northeast. But I continue to believe that our strategy of remaining primarily focused in our existing markets, call it East of the Mississippi, is still the best way for us to go. We get significant leverage when we grow within our market. So --

Got it. Sorry, go ahead.

-- we welcome the growth in the South. It's a great thing. We're doing really well there. But overall we drive such significant operating margin when we play within our markets. I want to stick to doubling the size of this company let's call it East of the Mississippi.

Got it. And then lastly, just sort of a follow-up, and this is more to make sure I heard you correctly, if anything else. There was a question before in recalls and alluding to, I think share shifting between dealers and yourselves or dealers and the aftermarket broadly.

From our experience no one knows the markets better than you do. You see a lot more than we do on a day-to-day basis and from your sort of NDAs. Am I hearing you correctly, there is no discernible share shift related to recalls to this point?

Well, I don't know that I can suggest whether there's share shift related to one element of things going on out there. What I have said is that based upon looking at all those NDAs and everything I know about the market, that we are maintaining our market share.

Yes, Jamie, this is Rob. Regarding the dealers, forgetting about the recalls, they're obviously more competitive. They're doing a better job. They're obviously significantly more expensive still than us.

So the differently in looking at the dealer's share is think about the car park. Number one, a third of them disappeared in 2009, so there's less competition. And the biggest factor when you just look at the disappearing of them is the last five years is we've had monster new car sales, correct?

Yes.

So you look at the new car sales moving to 16 million, 17 million, replacing years that are in their sweet spot, call it 0 to 4, or stretch it 0 to 5, replacing their 11 million or 12 million car a year, and inherently they have a built-in comp of anywhere from plus 10% to plus 20%. That will shift as the steadiness of the 16 million new car years remain, and now we start moving some of those 16 million, 17 million car years into our sweet spot.

Absolutely agree. If I may, then, as a follow-up to that, Rob, is there any truth to the idea that given, I mean, recalls have been across such a wide range of vehicles, both new and old, if you have a 12-, 13-, 14-, 15-year-old car that has been recalled, are you seeing or do you believe consumers are opting to replace that vehicle, or is that just not an issue because of kind of where they are in the income stream, broadly speaking?

Yes, I don't -- this is John -- no, I think we've seen -- I think the answer to your question is that scrappage rates are low. And we continue to see the cars that we're servicing continue to age out. And we're closer to 30% cars that are 13 years old and older.

And so, again, if that vehicle -- if that customer was one of the people that bought a new vehicle, we're seeing that vehicle, the used vehicle that they sold, still within the car park. And that's what's important to us. More vehicles in the car park, more vehicles six years plus in the car park, both of those things we should see over the next five years.

And when you look at it, if you look at that year of 10 million new cars sold to these last couple years with 16 million new cars sold, just project that forward a couple of years and we're going to see 6 million new cars in the 6 plus cohort of vehicles, and that's going to be a tailwind for us.

Understood. Well, you've been very gracious with your time, so thank you for taking the questions, and best of luck.

And we have no further questions in queue. I would now like to turn the conference back over to John Van Heel for any additional or closing remarks.

Thank you all for your time this morning.

We remain focused on managing the business through this environment and taking advantage of the significant growth opportunities it presents. I look forward to reporting on our progress in October. 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 this does conclude today's conference call. Thank you all for your participation. You may now disconnect.