Monro Inc (MNRO) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Monro Muffler Brakes' earnings conference call for the second 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 provision 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 to just consumer confidence and demand for auto repair, risks relating to leverage and debt service, including sensitivity to fluctuations and interest rates dependent 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; Kathy D'Amico, Chief Financial Officer; Brian D'Ambrosia, Chief Accounting Officer; and Rob Gross, Executive Chairman. With these formalities out of the way, I would like to turn the call over to John Van Heel. John, you may begin.

Thanks, Effie. Good morning, and thank you for joining us on today's call. We are pleased that you are with us to discuss our second-quarter fiscal 2017 performance. Today, we start -- we will start with a review of our results and update on our growth strategy, and outlook for the remainder of fiscal 2017. Then I will turn the call over for Kathy D'Amico, our Chief Financial Officer, and Brian D'Ambrosio, our VP of Finance and Chief Accounting Officer, who will provide additional details on our financial results.

Despite the difficult operating environment, our bottom-line focus, effective cost control and successful integration of our recent acquisition allowed us to deliver second-quarter earnings in line with our guidance. It is this same discipline and execution that has grown earnings by 50% over the past three years in a weak sales environment.

This year, we have accelerated our growth in this tough market by capitalizing on attractive acquisition opportunities, allowing us to both expand our business and increase the concentration of our geographic footprint, particularly in the South. These acquisitions lay the groundwork for sales and earnings growth in fiscal 2018 and beyond.

In just the first six months of this fiscal year, the acquisitions we have completed represent $135 million in annualized sales, or 14% sales growth. And there is still a lot of year left.

As was reflected in our guidance, our second-quarter results continue to be impacted by the lingering effects of last year's mild winter coupled with a tough consumer spending environment. Comparable store sales declined 4.3% versus an increase of 2.1% last year. Similar to our first quarter, consumers continued to allocate their spending, with high-ticket and more discretionary service categories such as exhaust and shocks remaining challenged, as were brakes and alignments, which left multi-year comparable store sales increases. However, tire sales improved and were flat for the quarter, led by a 2% increase in tire units.

Although we are disappointed that comparable store sales were not stronger, we did see signs of improvement as the quarter progressed that we expect will continue through the back half of this fiscal year. The declining comparable store sales decreased from 5.4% in July to 4.8% in August to 2.6% in September.

Similarly, traffic, which declined 2.5% for the quarter, improved to a 1% decline in the month of September. Brakes, which were down 13% for the quarter, declined to about half of that rate in September, and tire sales increased approximately 3% in the month of September on positive tire units.

October to-date comparable store sales are negative 3%, though Hurricane Matthew negatively impacted the month by approximately 1%. This is up against the comparable store sales increase of 3.7% in October of last year. We are encouraged, however, that October comparable store traffic has turned slightly positive and tire units continue to be positive month to date.

Geographically in the second quarter, our Southern markets continued to post positive comparable store sales in the low single digits across all three months of the quarter. And, while our northern markets remain challenged, we did see an improvement from month to month, with the disparity between the North and South narrowing to approximately 400 to 500 basis points in the month of September. We believe this sequential improvement is a positive reflection of our efforts to attract customers in this difficult environment. And consumers, while still pressured, are increasingly taking care of their overdue tire and service needs. We view this as further evidence that our sales should improve in the back half of fiscal 2017 with easier comparisons and the opportunity to benefit significantly from more normalized winter weather.

Turning to gross margin, second-quarter gross margin declined by 190 basis points. However, on a comparable store basis, gross margin declined by 30 basis points due primarily to deleverage of fixed cost from negative comparable store sales as well as higher sales mix of the lower-margin tire and maintenance category. This was partly offset by 50 basis points of leverage in SG&A as operating costs increased by only $1.5 million year over year despite operating 68 more stores. On a comparable store basis, second-quarter total operating expenses declined by approximately $2 million year over year, highlighting the effectiveness of our cost control measures in a tough environment.

Before I turn to our growth strategy, I would like to provide a brief update on our efforts to further integrate technology into our customer value proposition. As we've discussed in the past, we have shifted resources toward upgrading our online appointment process as well as improving collection and use of consumer email, feedback and reviews, which we use both in digital marketing and on our website. These efforts have led to an increase in online appointments of 20% in the second quarter versus the same period last year, exceeding the 10% increase in fiscal 2016.

Additionally, in the second quarter, we collected nearly 32,000 customer reviews, which posted a 94% approval score in areas most important to customers. These include how well Monro staff communicated the work needed to be performed, the quality of this work and the timeliness of our service. The overall satisfaction on these 32,000 reviews was 4.5 out of five, results we are very proud of. We continue to develop and implement improvements to our customer experience, both online and through enhanced tools, and training for our store employees to drive traffic, sales, customer loyalty and greater levels of efficiency.

Turning now to our growth strategy, we are seeing solid results as we move through the integration process of McGee Auto Service and Tires, the acquisition of 29 stores and a retread facility in Florida which we completed in the first quarter. This acquisition increases our store concentration in Florida to 87 stores.

Given this meaningful footprint, we continue to refine our plans for a new distribution center. As I have said previously, since we do not currently have a Company-operated DC fully servicing Florida market, we are not achieving the supply chain efficiencies we otherwise would. We expect to proceed with these plans when we exceed 100 stores in the state, which we are diligently pursuing through acquisition and greenfield growth. It is worth noting that we have already opened five new stores in Florida since the McGee acquisition was completed in May of this year.

In mid-September, we continued to increase our store footprint in the South as we completed the previously announced acquisition of Clark Tire, a 26-store chain of retail and commercial tire and service locations and a retread plant in western North Carolina. We now operate 57 stores in the state. As a part of the transaction, we also acquired four wholesale centers which are located in western North Carolina; Greenville, South Carolina; and Knoxville, Tennessee. These wholesale centers will continue to operate under the Tires Now brand name.

We expect Clark Tire to add approximately $85 million in annualized sales, representing a sales mix of 50% retail and commercial and 50% wholesale. The transaction will be reflected in our financial results beginning in our third quarter starting in October. And it is expected to be slightly dilutive to earnings per share in fiscal 2017.

As a note, after signing the definitive agreements in July related to Clark Tire, Monro had to work through vendor notice and other requirements related to the wholesale business, which took us into September. I am pleased now to be able to provide you with more details on how it enhances our competitive position.

Our fiscal 2017 acquisitions are strategically significant because they expand our retail and commercial business by 55 stores and $90 million in sales in the key markets of Florida and North Carolina, increasing both our scale and market share. They increase our tire -- Company tire units by approximately 25%, providing significant opportunity to improve our tire assortment and reduce tire cost. As a note, just $1 lower cost per tire is nearly $4 million in annual savings for the Company.

These acquisitions also allow us to improve distribution of tires to approximately 100 stores, or nearly 10% of our chain, while opening new sales opportunities for the Tires Now wholesale business itself. We believe that improving our ability to distribute tires to our own stores may represent a significant strategic advantage in the future. This will strengthen our position as an independent tire dealer, reduce our reliance on existing distributors and reduce our overall operating costs, which will further strengthen our business model. And last week, they expand our acquisition opportunities and make us a better acquirer of competitors with integrated retail, commercial and wholesale businesses.

Our approach to these commercial and wholesale businesses to operate -- is to integrate, strengthen and grow them in their respective markets, and then evaluate how we can further leverage them across the other 24 states and four distribution centers that we operate in. We expect these acquisitions will drive accelerated sales and earnings growth in the coming years.

As we have previously discussed, we believe that this challenging market is weighing more heavily on companies that lack meaningful scale and will lead to more acquisition opportunities than we have seen in the recent years. At present, we have more than 10 NDAs signed, each of them representing five to 40 stores within our existing markets. Beyond traditional M&A, we also continue to see an opportunity to ramp up the number of greenfield stores we open to increase store density in our markets at very attractive costs. In the second quarter alone, we opened 10 greenfield locations, which brings our total to 17 fiscal year to date. We remain on track to reach our goal of between 20 and 40 greenfield locations added by the end of this fiscal year. Remember that greenfield stores for us includes acquisitions of one- to four-store businesses. The difficult market is helping drive these great opportunities that we are taking advantage of.

Now let's turn to our outlook. Despite the ongoing challenges facing consumers, we anticipate that our comparable store sales will improve through the back half of fiscal 2017 with easier comp comparisons beginning in November as we anniversary last year's mild winter. We have adjusted our fiscal 2017 earnings guidance range to $2 to $2.10 per share from our previous range of $2.05 to $2.20 per share as a result of, one, hitting the low end of our guidance in the second quarter, which reduces the high end of our full-year guidance by $0.05. Two, more conservative comparable store sales assumptions for the third and fourth quarters. And, three, acquisition-related costs due to the high level of deal activity this fiscal year. The impact of the reduced comparable store sales outlook and higher acquisition costs equate to about $0.05 in earnings per share split evenly between those two items.

Now for the details. We expect third-quarter total sales in the range of $280 million to $285 million, reflecting sales contributions from recent acquisitions and a comparable store sales increase of 1% to 2.5%. As a reminder, comparable store sales last year in November and December combined decreased 5%, with tire units declining 10% amidst warm weather throughout our markets. Our third-quarter sales guidance at the low end assumes that we recapture one-half of that comparable store sales decrease in November and December, or about 2.5%. And the high end assumes we get the whole 5% back.

Based on these sales assumptions, we anticipate third-quarter diluted earnings per share to be in the range of $0.51 to $0.55 compared to $0.46 last year, with slight dilution from the fiscal 2017 acquisition.

Given our recent acquisitions, we are increasing our fiscal year 2017 sales guidance to a range of $1.30 billion to $1.40 billion versus our previous guidance range of $1 billion to $1.30 billion. This includes 11 months of sales from the McGee acquisition and six months of sales from the Clark Tire transaction. It also assumes full-year comparable store sales of negative 2.5% to negative 1.5%, compared to the previous guidance of negative 2% to flat.

We continue to anticipate our overall tire costs, including related warehouse and logistics, will be down slightly as a percentage of sales in fiscal 2017. And we expect this trend to continue into fiscal 2018 without regard to the 25% increase in our tire units from recent acquisitions. The vast majority of our non-branded tire sourcing continues to be outside of China, minimizing the impact of the tariff on Chinese-produced tires.

This guidance is based on 33.4 million diluted weighted average shares outstanding. The midpoint of the earnings guidance represents operating margin deleverage of 65 basis points and EBITDA of approximately $174 million.

It is important to note that the commercial and wholesale businesses that we have expanded as a part of our recent acquisitions operated a lower gross margin than our retail business. However, they also require a lower level of SG&A expenses. Therefore, we expect that this change in our sales mix will reduce gross margin by approximately 200 to 250 basis points, which will be offset by a similar reduction of SG&A expenses as a percentage of sales.

In terms of earnings going forward, the $90 million of retail and commercial business should contribute similarly to prior acquisitions, and the wholesale business should deliver EBITDA between $4 million and $5 million including improvements in tire cost and distribution efficiency.

Turning to our longer-term outlook, although this year -- although this has started off as a difficult year, our outlook for the industry remains positive and we expect it to strengthen going forward. Vehicles 13 years old and older accounted for 29% of our traffic this quarter, up from this time last year.

These vehicles continue to produce average tickets similar to our overall average, demonstrating that consumers continue to invest in and maintain their vehicles even as they advance in age.

Additionally, service bays in operation are expected to continue to decline. But the most important driver is that total vehicles in operation are expected to grow 9% between 2015 and 2020, with vehicles in our sweet spot of six years old and older generating significant growth. We expect this tailwind to have a positive impact on our comparable store sales over the next several years.

While the macro environment remains uncertain, with continual minimal wage growth and the impact of higher health care premiums and deductibles weighing on consumer spending, we are hopeful that improving trends in traffic, tire units and service categories, combined with a return to more normal winter weather, will drive favorable results in the back half of this fiscal year. All the while, we will continue to aggressively grow the business by capitalizing on the attractive acquisition opportunities we see in the marketplace, laying the groundwork for sales and earnings growth in fiscal 2018 and beyond.

I would like to thank all of our employees for their hard work and consistent, solid execution. We greatly appreciate all they do. This quarter in particular, our thoughts are with everyone who has been impacted by the recent hurricane. We wish them all a fast recovery.

Now I would like to hand the call over to Brian D'Ambrosia and Kathy D'Amico for a review of our financial results. Brian?

Thank you, John. Sales for the quarter increased 2.9% to $9.4 million. New stores, defined as stores opened or acquired after March 28, 2015, added $22.3 million, including sales of $20.1 million from fiscal 2016 and 2017 acquisitions. Comparable store sales decreased 4.3%, and there was a decrease in sales from closed doors of approximately $2.3 million. Additionally, during the quarter ended September 2016, we completed the bulk sale of approximately $1.4 million of inventory to a buyer company, as compared to a $2 million transaction in the second quarter of last year. There were 91 selling days in both the current and prior-year second quarters. Year to date, sales increased $9.8 million, and 2.1%. New stores contributed $40.9 million of the increase, including $37 million from fiscal 2016 and 2017 acquisitions. Largely offsetting this was a decrease in comparable store sales of 5.6%. Additionally, there was a decrease in sales from closed doors of approximately $4.6 million. There were 181 selling days for the first six months of this and last fiscal year.

At September 24, 2016, the Company had 1,097 Company-operated stores and 132 franchise locations, as compared with 1,029 Company-operated stores and 143 franchise locations at September 26, 2015. During the quarter ended September 2016, we added 36 Company-operated stores and close three. We closed one franchise location and purchased one from an existing franchisee as a Company-operated store. Year to date, we added 72 Company-operated stores and closed four. We closed two franchise locations and purchased one from an existing franchisee as a Company-operated store.

Gross profit for the quarter ended September 2016 was $100 million, or 40.2% of sales, as compared with $100.7 million, or 42.1% of sales, for the quarter ended September 2015. The decrease in gross profit for the quarter ended September 24, 2016, as a percentage of sales was primarily due to an increase in material cost of sales, including outside purchases, which increased as percentage of sales as compared to the prior year.

Product costs, especially in tires, were down meaningfully this quarter as compared to the prior year. However, the decline in product costs was offset by a shift in mix from the higher-margin service categories to the lower-margin tire category as well as the impact of acquisition.

On a consolidated basis, labor costs increased slightly as a percentage of sales due to the impact of negative comparable store sales.

Distribution and occupancy costs decreased moderately as a percentage of sales, largely due to distribution cost savings. On a comparable store basis, gross margin decreased by 30 basis points, driven by the deleveraging impact of fixed costs against negative comparable store sales.

Gross profit for the six months ended September 2016 was $198.1 million, or 40.8% of sales, as compared with $200.4 million, or 42.1% of sales, for the six months ended September 2015. The year-to-date decrease in gross profit as a percentage of sales was due to similar factors as I described for the quarter. For the six months on a comparable store basis, gross margin was relatively flat at 42.3% for the current-year period versus 42.2% for the first six months in the prior year.

Operating expenses for the quarter ended September 2016 increased $1.5 million and were $68.1 million, or 27.4% of sales, as compared with $66.6 million, or 27.9% of sales, for the quarter ended September 2015. The decrease as a percentage of sales was primarily due to decreased incentive compensation expense related to pay plans that paid based on performance as compared to the prior-year quarter. Partially offsetting this decrease was an increase in intangible amortization and loss on closed stores as compared to the prior-year quarter.

In the prior year, the Company realized a gain on the sale of a closed store which did not occur in the current-year quarter. On a comparable store basis, operating expenses decreased by approximately $2 million as compared to the second quarter of last year. For the six months ended September 2016, operating expenses increased by $2.1 million to $134.8 million, or 27.8% of sales, as compared with $132.7 million and 27.9% of sales for the prior-year period.

The increase primarily relates to increased expenses for new stores as well as an increase in intangible amortization and loss on disposal of fixed assets, as discussed for the quarter. These were partially offset by reduced incentive compensation and benefit costs.

On a comparable store basis, operating expenses decreased by approximately $4.5 million. We believe this demonstrates the effectiveness of our strong cost control in a period of soft sales.

Operating income for the quarter ended September 2016 of $31.9 million decreased by 6.4%, as compared to operating income of approximately $34.1 million for the quarter ended September 2015, and decreased as a percentage of sales from 14.3% to 12.8%. Operating income for the six months ended September 2016 of approximately $63.2 million decreased by 6.6%, as compared to operating income of approximately $67.7 million for the six months ended September 2015, and decreased as a percentage of sales from 14.2% to 13%.

Net interest expense for the quarter ended September 2016 at 1.8% of sales increased $0.7 million as compared to the same period last year, which was at 1.6% of sales. Weighted average debt outstanding for the quarter of fiscal 2017 increased by approximately $56 million as compared to the second quarter of last year. This increase was due to an increase in debt outstanding under our revolving credit facility as well as an increase in capital lease debt reported in connection with the fiscal 2016 and fiscal 2017 acquisitions. The weighted average interest rate remains fairly flat as compared to the second quarter of the prior year.

For the six months ended September 2016, net interest expense increased by $1.8 million as compared to the same period in the prior year, an increase from 1.5% to 1.8% as a percentage of sales for the same period. Weighted average debt increased by approximately $75 million, and the weighted average interest rate decreased by approximately 20 basis points as compared to the same period in the prior year. The effective tax rate was 36.3% of pretax income for the quarter ended September 2016 and 38% for the quarter ended September 2015.

The effective tax rate for the six months ended December 24, 2016 and September 26, 2015 was 37.1% and 38%, respectively, of pretax income. Net income for the quarter of $17.5 million decreased 7% from net income for the quarter ended September 2015. Earnings per share on a diluted basis of $0.53 decreased 7% as compared to last year's $0.57. For the six months ended September 2016, net income of $34.3 million decreased 9%, and diluted earnings per share decreased 9.6% from $1.14 to $1.03.

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

Thanks, Brian. Good morning, everybody. Our balance sheet continues to be strong. Our current ratio at 1.1 to one is comparable to fiscal 2016. Inventory turns at September 2016 improved slightly as compared to year-end and the second quarter of last year.

In the first six months of this year, we generated approximately $68 million of cash flow from operating activities and increased our debt under our revolver by approximately $94 million. Capital lease and financing obligations increased $22 million primarily due to the accounting for our fiscal 2016 and 2017 acquisitions.

At the end of the second quarter, debt consisted of $197 million of outstanding revolver debt and $199 million of capital leases and financing obligations. As a result of the fiscal 2017 borrowing, and our debt-to-capital ratio, including cap leases, increased to 41% at September 2016 from 34% at March 2016. Without capital and financing leases, our debt-to-capital ratio was 26% at the end of September 2016 and 16% at March 2016.

Under our revolving credit facility, we have $600 million 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 $376 million of availability today not counting the accordion. We are fully compliant with all of our debt covenants and still 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 the 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 first six months of this year, we spent approximately $18 million on CapEx and $129 million on acquisitions, which also includes the greenfield small one- to four-store deal. Depreciation and amortization totaled approximately $22 million, and we received $2 million from the exercise of stock options. We paid about $1 million in dividend.

That concludes my formal remarks on the balance sheet. With that, I will turn the call over to John.

Before I turn the call over to the operator, I would like to say a few words about our planned CFO transition. As you know, we have been planning the transition of our CFO role for some time. Consistent with her contract, Kathy D'Amico will be transitioning the CFO role to Brian D'Ambrosio on January 1 of 2017. Kathy will stay on as a part-time consultant through at least August 2018.

Kathy has been with Monro for 23 years, all as our Chief Financial Officer. Over that time, she has helped guide us through a period of exceptional growth. Monro is now over 10 times the size it was when Kathy became CFO, and she has built an outstanding finance organization. I thank her for her years of counsel as well as her enormous contribution to this Company.

I also welcome Brian D'Ambrosio to this important position. Brian has worked closely with Kathy over the last four years as part of our succession plan. He brings strong leadership and extensive financial background and a deep understanding of our Company. I am confident that he will continue Monro's commitment to financial discipline and stronger shareholder return.

Kathy, thank you again. And Brian, we look forward to your new role. And with that, I will turn the call back over to the operator for questions. Operator?

(Operator Instructions) Bret Jordan, Jefferies.

On the regional performance, John, I think you mentioned that the spread had narrowed to 400 or 500 basis points in September. Could you give us a feeling for what the spread was at its widest? Were the Southern stores comping positive pretty much during the quarter, and most of the drag was in the North?

Yes, the Southern stores comped positive each month of the quarter, and the Northern stores improved during the quarter. It was 700 to 800 basis points at its widest point.

Okay, great. And then on tires, units were up 2%, but the dollar comp was flat. Is that a mix shift within tires to more import product, or is there pricing pressure on tires on a like-for-like basis?

It is primarily mix shift to lower-cost tires.

Okay. And then one last question -- you mentioned within the gross profit comments higher outside purchases. Is that higher outside purchase in markets where you don't have distribution, or are there higher outside purchases in your existing markets as well?

I think we just said -- it was the comment on materials including outside purchases. That's all that was.

Okay, so there's not any change in an outside buying pattern in your legacy margins?

No. We are doing well there, actually.

Okay. And I guess one last that leads to the -- to the Carolina stores, would those be distributed out of Florida if you build a DC, or is that going to be either outside buying or from the Baltimore DC?

No, that will -- the Carolina stores will be from the wholesale business. That is what -- that's one of the reasons that we are so interested in it. We now have the ability to distribute to 100 of our stores, or almost 10% of our entire chain, from those DC's. And that will also bring the trucks for tires now past a lot more potential customers. So there's a benefit on our side from increasing control with distribution and lower cost, and there is a benefit to that wholesale business because we are expanding their natural routes, which will give them some sales opportunities.

Okay, so you are going to put parts in the -- parts -- beyond tires, you are going to actually distribute your parts in Carolinas as well?

We are taking a look at exactly how we will do that, but that will be -- those DC's will be involved, yes.

Okay, great. Thank you.

Rick Nelson, Stephens.

I wanted to ask about the sequential improvement that we are seeing in September covering comps and traffic. I'm curious if promotions have stepped up at all. Or do you think those kind of deferral cycle is coming to end, or are comparisons just getting easier? What in your mind is driving?

The comparison actually got tougher between September and October. September last year was up 1.9 and October was up 3.7. We said two things about the trends. One, that the impact of the winter weather would dissipate as we went through the quarter. And, secondly, that we would expect the consumer to improve as we -- as they move through the year and got through some health care deductibles. So I think that -- I am hopeful that there is some of that consumer improvement that is a part of that.

And were promotions going to step up at all?

No. No. Look, I'm not happy about a -- I'm running a minus [2] adjusted for Hurricane Matthew in October. That's the reason, frankly, that we were more conservative on the sales guidance. I am hopeful that some of these signs that we are seeing are the result of consumers getting better. As a note, comp -- traffic turned positive in October, but we are still running down a little bit. We're not out of the consumer woods yet. But this quarter is going to be significantly impacted by the weather, and I think that's going to be positive.

Yes, very easy compares there, particularly in November. Gross margin pressures -- you talked about being driven by mix. I'm curious, within that tire category on a like-for-like basis, if you are seeing year-over-year pressures there. Or are things more stable?

Year-over-year pressures -- well, I can say this, that the costs are down. That is being trumped by the mix shift that we saw in Q2.

But we are collecting more dollars per tire than we ever have. And that should continue, especially with the 25% increase in units next year and the opportunity that overlapping our cost reductions and the increased volume will deliver the first six months apples-to-apples in fiscal 2018.

Yes, thanks for that color. That 25% increase in tire units, how do you see that scale helping with the margins and your costs?

Well, as I said, every dollar of decrease in tire costs is almost $4 million saved for the Company. So it is significant. And what I would say to you is there aren't many companies walking around with a 25% tire unit increase to be able to shop to tire manufacturers, and we are that company. So, I expect it to help significantly on the tire costs next year. And, again, what Rob said is, and what I said in my prepared comments, is that we expect the tire costs to continue to go down into fiscal 2018 outside of our ability to leverage this 25% increase.

Got it. Thanks a lot, and good luck.

Matt Fassler, Goldman Sachs.

I would like to dig a little bit deeper into gross margin. You spoke a bit about the mix of tires relative to services, some of the higher-margin services, that perhaps are a bit softer. As you think about your outlook for the remainder of the year and you anticipate the sales recovery, what is your expectation about the dynamic around those mix factors, please?

Yes, I think that at the -- if we are at the low end for the remainder of the year, we have minimal mix pressures. If we are at or above the higher end, we probably get some mix pressure because tire is really outperforming. But in that case, we're going to be doing very well on the sales side.

So I guess what you are saying is if you think about where the delta is likely to be, kind of between the high and the low end of sales, you think it will be more tire-driven than service-driven at this point?

Yes, at -- well, certainly for this quarter and Q4, our entire units were down 10% in November and December. So there's a significant opportunity there.

So what we're seeing is a slight improvement in the consumer. It looks like -- not dancing in the streets about that -- where they are right now, but we have a significant opportunity with weather. And what we have always said is weather impacts the sale of tires significantly. So I think -- that's why I look at the low end being more general, less pressure, less variation in margin. And if we outperform in tires, we're going to get much higher sales and probably a little bit of mix shift.

Great. And then just a quick follow-up. You were helpful at the beginning of the call in talking about the difference in terms of the impact of gross margin on a comp basis versus the decline that we saw overall. As we think about the impact of acquisitions, including the ones that you closed or announced this quarter on gross margin, how much longer should that kind of impact persist in your view? And does the magnitude that we saw play out in the September quarter look like it's likely to repeat itself over the rest of the fiscal year?

Yes, I wanted to make sure we explained better right now than we did, frankly, in the first quarter about the impact of the commercial and wholesale businesses on margin and on SG&A leverage. I would expect over the next -- the 200 to 250 basis points is a shift that we will see for the next year both in gross margin going down and in SG&A leverage picking up. Remember that we are a Company that does acquisitions -- anytime we do acquisitions that are significant, we are diluting our operating margin. And we are in that phase with these acquisitions. But I wanted to point out that there is a big shift also just in lower gross margin and higher SG&A. So those factors will play -- sorry, and lower SG&A as a percentage of sales. So I wanted to make sure that that was clear.

But these acquisitions are -- they are very strategic for us. They give us significant opportunities to grow the business and improve the business model.

So to answer your question, yes, we're going to see that type of dynamic of lower gross margin and higher SG&A -- sorry, higher SG&A leverage over the next year.

That is super-clear. I appreciate it. And then one final quick one. You talked about the beneficial impact of, I guess, a lower incentive comp this quarter versus a year ago for better or for worse. As you think about your expense compares for the rest of the year, your incentive comp compares for the rest of the year, how did those look a year ago? I haven't had a chance to go back and look at your comments yet from Q3 and Q4 of last year.

Yes, we -- hopefully that -- hopefully it compares favorably to what we did last year or what we had last year from a management perspective. That is, people getting paid bonuses. But if our results don't warrant a bonus, we obviously won't pay it, so we will have a little bit of take-back in the rest of the year, probably mostly Q4.

And that is with the plan as it stands today? In other words, if you make your numbers, incentive comp is down a little, flat, up a little for the rest of the year? Just to understand a little bit of the split.

No, incentive comp is going to be down (multiple speakers). We each think -- I think what John was referring to is comp management nothing, potentially, most likely, based on where we are now. But I think he was referring to more the ins and outs of as comps get better, as stores are performing better, those managers and those field managers will have an opportunity to get incentive comp.

Got it. Understood. Thank you so much, guys. I appreciate it.

Michael Montani, Evercore ISI.

Just wanted to ask John, give you the opportunity again, I guess, really to highlight the initiatives that you have under your control outside of the weather and the easier comparison set to really jumpstart the comp base as we get into the next 12 months.

Well, I talked about the initiatives we have in terms of marketing and supporting our field organization. But we are currently aggressively pursuing comps in traffic. It has just been a tough market. And I think we're not alone in pointing out the fact that it's been a tough market particularly in our markets. And I think true to the business model that we have established, we are getting acquisitions done in a tough market, including a lot of the greenfield stores where we are seeing smaller operators really be pressured.

I think you can see the progression that we have talked about in Q2 into September and into October that shows that what we're doing to drive traffic is paying some dividends. Our traffic in October is positive with a hurricane. So we got a pressured consumer, and we are doing all the right things to drive traffic and pursue comps.

I guess just to follow up, can you talk a little bit about the balance between potential for future price increases and an environment where, say, the traffic were not to improve? How would you weigh balancing those two things moving forward?

Well, I think in general as things get tougher, pricing in the market tends to get a little tighter. So we have certainly been through the most amount of comp pressure that we have seen in years in the first six months of this year. And we did talk about a little bit of pricing pressure in Q1 that abated by the end of it. And Q2 is more about a mix shift within tires to lower-priced tires.

So our approach, again, is to have a broad assortment so consumers can find the right tire that fits their budget and on which we make the most money. We have talked about that extensively over the last couple of years and our ability to expand that assortment, much of that with import tires, where we have been able to expand the amount that we are making on every tire. So, generally, a tougher market is going to lead to tougher pricing.

I certainly hope that the remainder of this year, where hopefully we are buoyed by some positive comps driven hopefully by a return to normal winter weather will keep the market stable.

And maybe to ask differently, then, does the positive comp guidance include any assumed price increases or is that purely on volume?

No, I think it's -- again, it's a mix at the low end of price and some units. And at the higher end, it's going to be probably more units.

Thank you.

Scott Stember, CL King.

You guys talked about in the release here that your comps in September were down 2.6%. Did you give the first two months of the quarter?

Yes, we did. It was down 5.6% and -- 5.4% and 4.8%.

5.4% and 4.8%? Okay.

And then 2.6% in September.

Got it. And talking about, I guess, tying into the guidance of 1.5% to 2.5% comps growth in the upcoming quarter-over-quarter we're in right now, October last year was up 3.7%. What was the November number again in December? Over last year?

November was down 9. December was flat.

Okay, so --

November being the much larger month from a dollar perspective.

Got it. Now, just assuming -- not being able to predict what the weather will do, how much wiggle room is there within guidance if we were to have another mild winter? I'm just trying to see where things are -- how things are calibrated and the sensitivity of where things could potentially play out.

I'm not sure what kind of a comp you would incorporate in there, but I have tried to put out a number that I think we can hit if we are anywhere near the low end of comp guidance.

Okay, got it. And just one last question on the -- what were the acquisition costs again in this quarter and what are you having guidance?

We increased the acquisition costs. I said that the $0.05 reduction in guidance on the low -- $0.05 reduction in guidance was half due to the comp -- the more conservative comps and half due to acquisition costs -- increased acquisition costs.

Remember, he is talking about the increase. We have acquisition costs and due diligence costs every quarter, every year. This was because of the level of activity trying to be conservative and including additional as we are working on other deals the rest of this year.

No, I appreciate that. I'm just trying to figure what you expect this year versus last year just to maybe see how much of the headwinds to earnings is really coming from additional acquisition costs. Just trying to get --

No, the headwinds turning are coming from us not getting any sales.

Fair enough. That's all I have. Thank you very much.

James Albertine, Consumer Edge Research.

I wanted to circle back -- it's great to see the sequential improvement, and we really appreciate all the detail you have provided there. But you made a comment that we actually were able to pick up in our data as well as it relates to digital.

And I think perhaps what I'm getting at is John, you made some other comments as it relates to the consumer maybe getting a little bit better, we hope. I'm wondering is there any data at this point that you can provide where perhaps if you look at customers that schedule appointments online, have a propensity to spend X dollars more per service or if it expands your addressable market by a certain amount? Maybe you can tell that by how far people have to drive to come and get service. I'm just wondering -- digital sounds like it's finally turning a significantly positive for you guys and could be maybe a longer-term trend to watch. So just hopeful that there might be some other color you can provide.

No. Our consumers that make appointments online aren't really much different from a sales standpoint than our global consumer base. Most people make appointments online for oil changes and tires, which are key traffic drivers for us. What I would say is consumers that are younger tend to skew a little bit more to doing that online. And I think that is an important element of us expanding the addressable market and making sure that we are moving where consumers are, which is exactly what we want to do.

That's very interesting and helpful. And you made another comment as well on 13-year-old or greater vehicle mix. I think he said it was 29% of your traffic, if I wrote that down correctly. I wanted to understand, though, as the vehicles age where the spending shifts. And I'm just -- I'm wondering if there's maybe more higher oil change mix, but a lower front-end shock mix or a lower brake mix or a lower tire mix. But just trying to get an understanding of how that dollar trends over time in those much older vehicles.

Sure. The older vehicles require more repair, but, typically, they are trading down on things like tires and some other things like that. So, what's important to me -- if you look at our business, between tires, oil changes, brakes and general maintenance, you've got basically more than 80% of our business. What we need is a lot of cars out there being driven a lot of miles. The fact that they are older is good for us because older cars generally need more repair. So you get a little bit more repair offset by some trade-down, and that ticket is very consistent with our overall average ticket.

But those type of trends in vehicles in operation and in aging of vehicles are trends that are going to help us over the next five years.

If I may just try and interpret what you just said in maybe a slightly different way, what my concern would be is that a 15-year-old vehicle is worth less than a 13 than is less than an 11-year-old vehicle. And so the return on my investment in fixing it is lower as it gets older. It sounds like that is not the case, though, based on the example you provided. Is that fair to say?

Well, if you are asking about whether consumers are making decisions whether to scrap their car or buy a new one or maintain their car -- because, again, I'm talking generally about maintenance. I think the data that we have shows that consumers are choosing to maintain those vehicles. And the fact that they are made better overall at 10 years to 15 years doesn't have any impact on the need for an oil change or the brake pads you had replaced when it was 13 years old. And now that it's 15 years old, you need to brake pads again. You are either looking at a few hundred dollars for a brake job or going out and spending X thousands on a brand-new car. We are seeing people continue to maintain those vehicles, and that's good for us.

I wouldn't say brand-new, clearly, but, yes, I understand what you're saying. I don't think they are brand-new as the option, either.

But you need -- that's why I said thousands of dollars, even if it's only $10,000.

Sure. We're just seeing a lot of pressure on consumer spending is all. That's the reason why I asked. And it's health care and everything else. Maybe you drive around on crummier brakes and bald tires longer, and that is contributing to deferred maintenance cycles is really all I was getting at. But you have done more than a fair job of answering the question. I appreciate that.

I also want to wish Kathy -- I know she's going to be around for a while longer -- but the best in her transition, and thank her again for the many, many years of help and service.

Thank you, James. I appreciate it.

Yes, she's not going anywhere soon.

Best of luck in the next quarter.

Carolina Jolly, Gabelli.

I just wanted to check in on acquisition multiples given the continued pressure on your smaller competitors. Are you seeing any changes there?

No. No changes there.

As we said, there's no changes in the multiples but the prices are going down because trailing 12-months EBITDA is under pressure.

Okay, perfect. That makes sense. And then did you provide any numbers on the oil changes yet?

Oil changes was -- for the quarter were down consistent with our traffic -- down 2.5% or something like that. And that also has improved into September and into October, again, as our traffic has improved through that period.

Okay. Perfect. Thanks for all the detail on the call. It was great. Thanks.

And that will conclude the question-and-answer session. I would now like to turn the call back over to John Van Heel for any additional or closing remarks.

All right. Thank you all for your time this morning. In this difficult market, we are focused on driving profitable sales, and some winter weather should help significantly. At the same time, we are aggressively expanding our business through acquisition, laying the groundwork for sales and earnings growth next year and beyond.

As always, we appreciate your support, and our team who works to provide outstanding service to our customers every day. Thanks again, and have a great day.

And that does conclude today's conference. Thank you for your participation and you may now disconnect.