Monro Inc (MNRO) 2017 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Monro Muffler Brake's Earnings Conference Call for the Fourth Quarter and 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'd 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, risks relating to leverage and debt service, including sensitivity to fluctuations in interest rates; dependence on and competition within the primary markets in which the company stores are located; and the need for and costs associated with store renovations and other capital expenditures.

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

Joining us on this morning's call from management are John Van Heel, President and Chief Executive Officer; Brian D'Ambrosia, Chief Financial Officer; and Rob Gross, Executive Chairman.

With these formalities out of the way, I'd like to turn the call over to John Van Heel. John, you may begin.

Thanks, Effie. Good morning, and thank you for joining us on today's call. We are pleased that you are with us to discuss our fourth quarter and fiscal 2017 results.

Today, we will start with a review of our results, an update on growth -- our growth strategy, followed by our outlook for fiscal 2018. Then I'll turn the call over to Brian D'Ambrosia, our Chief Financial Officer, who will provide additional details on our financial results.

Looking back over fiscal 2017, our business was impacted by challenging economic conditions facing our customers, coupled with unseasonable weather, particularly in the fourth quarter, which led to a decline in comparable store sales for the fiscal year of 4.3%.

As we have in the past, our company responded to this difficult environment by capitalizing on attractive acquisition opportunities, allowing us to grow our total sales for the fiscal year by 8% to a record $1,022,000,000 while limiting our earnings downside through effective cost management.

Importantly, as we enter fiscal 2018, our fiscal 2017 acquisitions, which includes 71 stores and approximately $150 million in annualized sales growth over fiscal 2016, they set a strong foundation for future sales and earnings growth.

Additionally, our significant greenfield expansion added 30 more stores in fiscal 2017, providing us with greater store density and sales in our core markets at very attractive costs. I will provide more details behind our 2018 plan in a moment, but first, I would like to recap our fourth quarter and full year fiscal 2017 results.

Total sales in the fourth quarter increased 10% on strong acquisition growth despite a decline in comparable store sales of 8%. Following a strong December, which posted positive comparable store sales of 11% in the month led by tires, we saw weaker top line trends in the fourth quarter. From a geographic perspective, the mild weather in the fourth quarter led to regional disparity in comparable store sales performance as our northern markets underperformed our southern markets by 500 basis points.

We believe these top line trends in regional differences are very similar to the sales cadence of other competitors in the after-market space as well as the acquisition candidates we are engaging with. We are not only continuing to maintain our market share, but we believe we are making more money in this difficult environment than our competition.

So far in fiscal 2018, we've seen meaningful improvement in comparable store sales, which were up approximately 3% in April and 2% month-to-date in fiscal May. The comp increase is being driven by an increase in average ticket. This increase is led in part by higher average tire ticket of 2%.

We are also encouraged to see strength in the brake category with higher-than-average ticket repairs. We believe that this may signal that customers require more work to be done after long deferring repairs.

Additionally, the geographic disparity between our northern and southern markets has narrowed and turned in favor of our northern markets quarter-to-date, though both regions are comping positive. In fact, our strongest markets have been New Jersey, New York and Maryland in which we have seen high single and double-digit comp sales increases.

Despite these positive trends quarter-to-date, we remain cautious with respect to the health of our consumer and are hopeful that we will finally see normalized weather in the second half of this fiscal year following 2 consecutive warm winters.

Turning to gross margin. Fourth quarter gross margin declined by 310 basis points versus the prior year, primarily as a result of the sales mix impact from fiscal 2017 acquisitions and deleverage from negative comparable store sales.

On a comparable store basis, fourth quarter gross margin declined by 40 basis points year-over-year due to deleverage. For the fiscal year, on a comparable store basis, gross margin declined by only 20 basis points despite the second worst comparable store sales decline in 20 years.

While I'm not happy about our comps, our ability to maintain our gross margin and minimize the impact on profitability highlights the strength of our business model in tough operating environments.

Turning to expenses. Total operating expenses for the fourth quarter increased by $7.7 million. However, on a comparable store basis, total operating expense dollars actually declined slightly year-over-year, underscoring our diligent cost control and performance-based pay plan.

Now I would like to provide a brief update on a number of new customer-focused enhancements we began implementing across our store base in late fiscal 2017 and into 2018 to drive sales and efficiency. These include new ways to communicate directly with our customers, including the ability to send text messages directly from our stores; a new and improved customer relationship management system and in-store and online informative videos, educating our customers on service and repairs, helping us close more sales.

Second, improvements through our point-of-sale system, including improved fleet business processing, more efficient tire quotes and enhanced electronic ordering from outside parts vendors, which will result in lower parts costs. Third, a comprehensive online training program to more fully support the career development of our technicians.

And fourth, the launch in March of our new private label credit card named the Drive Card. This new bank-sponsored credit card is exclusive to Monro's brand and provides us with complete control over customer-targeted marketing and promotional offers, which we believe will drive greater long-term customer loyalty.

We have been very pleased with the early results of the Drive Card as our total sales volume on this card has already surpassed the Goodyear cards that we previously issued. In March and April, we processed just short of 10% of our overall retail sales on these cards and looked to grow the Drive Card's penetration to 20% of retail sales.

Our field team has embraced this customer loyalty tool as demonstrated by the fact that we are currently taking about 5x the number of applications we were before this launch. Our fiscal 2018 budget includes great Drive Card offers such as discounted oil changes, service discounts and tire rebates, which we believe will drive increased return visits from our customer and attract some new ones as well.

We expect these initiatives to be positive contributors to traffic, employee retention and store efficiency in fiscal 2018, and we also believe there remains significant opportunities to incorporate technology throughout our business and help our teams drive top line growth.

It's also worth noting that we continue to see strong increases in our online appointments, which were up approximately 20% for the fiscal year. Additionally, the customer reviews we collected in fiscal 2017 remained very favorable with an overall satisfaction score of 4.5 out of 5 on 100,000 completed surveys.

Now let's turn to our growth strategy. We are continuing the integration of our fiscal 2017 acquisition, which is progressing in line with our plan and is expected to add approximately $150 million in annualized sales, representing 16% sales growth over fiscal 2016.

This includes the most recent acquisition completed in our fourth quarter of 16 Car-X stores, 13 of which are located in Illinois and 3 of which are in Iowa. We continue to expect these stores to generate $15 million in annualized sales, representing a sales mix of 75% service and 25% tires.

As a reminder, we also completed the acquisition of Clark Tire in mid-September, which is expected to add approximately $85 million in annualized sales, representing a sales mix of approximately 50% retail in commercial and 50% wholesale.

And lastly, the McGee Auto Service & Tire acquisition completed in May of 2016 is expected to deliver $50 million in annualized sales, representing a sales mix of 40% service and 60% tires.

These fiscal 2017 acquisitions are strategically significant because they expand our retail and commercial business by 71 stores and $105 million in the key markets of Florida, North Carolina and Illinois, while also adding $45 million of wholesale tire sales, which combined, increases both our scale and market share. They increase our tire unit purchases by approximately 25%, expanding our tire assortment and strengthening our purchasing power, which is particularly important as we enter the first fiscal year of tire cost increases in several years, and we look to move purchasing volume to manufacturers with the most attractive costs.

They allow us to directly distribute tires to approximately 100 of our stores or roughly 10% of our chain, strengthening our position as an independent dealer and reducing our reliance on distributors. Both, thereby allowing us to maximize profitability while creating new organic growth opportunities in the wholesale locations themselves.

And lastly, they expand our acquisition opportunities to include competitors with integrated retail commercial and wholesale location. We believe these acquisitions will continue to strengthen our competitiveness in the market while also providing another valuable avenue of growth over the next several years.

As we've told you in the past, our long-term acquisition growth is underpinned by independent dealers getting older and not having an internal succession option. That said, we continue to see an elevated level of acquisition opportunities in the marketplace and as a result of the difficult operating environment. We have more than 10 NDAs signed, each of them representing 5 -- between 5 and 40 stores within our existing markets. We will continue to capitalize on these attractive opportunities and aggressively grow and expand our business.

However, any potential reduction in tax rates for small businesses can temporarily delay some transactions through the second half of fiscal 2018. At the same time, a rising cost environment for tires should pressure the earnings of smaller dealers, which should result in more attractive prices for these businesses.

We are also continuing our greenfield expansion with a goal of opening between 20 to 40 stores per year. In fiscal 2017, we opened 30 greenfield locations, and we expect to open a similar number in fiscal 2018, including approximately 7 locations in the first quarter.

As a reminder, greenfield stores for us include new construction as well as the acquisition of the 1 to 4-store operation. These locations are expected to average approximately $1 million in annualized sales and require roughly half the investment per store compared to a larger acquisition, which should result in an even higher return on investment over time.

Turning now to our outlook for fiscal 2018. Based on current economic conditions, the contribution of recent acquisition and positive quarter-to-date comparable store sales, we expect total sales in the first quarter of fiscal 2018 to be in the range of $270 million to $275 million, representing an increase of 14% to 16% year-over-year. This is based on an increase in comparable store sales of 2% to 3%.

We anticipate first quarter diluted earnings per share to be in the range of $0.52 to $0.56, an increase of 4% to 12% year-over-year compared to $0.50 in the first quarter of last year. Please note that our first quarter earnings per share guidance assumes a slight contribution from our fiscal 2017 acquisition.

For the full fiscal year, we anticipate comparable store sales to increase 2% to 4% on a 52-week basis. Or, 4% to 6% when accounting for the 2% comp sales benefit from an extra week in our fourth quarter. We expect fiscal 2018 total sales of $1,125,000,000 to $1,155,000,000, representing an increase of 10% to 13% year-over-year. As mentioned previously, our comparable store sales quarter-to-date are also approximately 2.6% driven by higher average ticket.

For the fiscal year, we expect that higher tire selling prices driven by the pass-through of higher costs will lead to a sustained increase in overall average ticket of 2% to 3% year-over-year. Please note that the high end of our fiscal 2018 comparable store sales guidance also incorporates a 1% traffic increase.

Fiscal 2018 guidance does not assume any future acquisitions or greenfield store openings.

Now let's turn to our outlook on costs. As we mentioned on our last earnings call, recent increases in raw materials have led several tire manufacturers to announce price increases of between 3% to 14% with the highest of these increases driven by branded tire manufacturers. Importantly, the level of price increase vary significantly by manufacturer with several manufacturers actually beginning to offset these announced increases with additional volume rebates as raw materials moderate.

It is important to note that our direct import tires have been subject to cost increases towards the lower end of the range reference. These imported tires represent approximately 1/3 of our tire units sold in the fourth quarter and allow us the flexibility to source tires at attractive costs as well as realize higher gross profit dollars per tire than branded alternative.

Our fiscal 2018 guidance incorporates a cost increase for tires and oil combined, which we believe will be lower than most competitors, particularly smaller independent dealers. This guidance reflects higher cost per tires partially offset by lower oil costs.

In light of these cost increases, we expect to generate operating leverage on a comparable store sales increase above 2%. This is higher than the flat to negative comparable store sales we needed to lever expenses in recent years. Also every 1% increase in comparable store sales above this 2% threshold generates an incremental $0.08 in EPS for the fiscal year, excluding the extra week.

Based on these assumptions, we expect fiscal 2018 earnings per diluted share to be in the range of $2.10 to $2.30, representing earnings growth of 14% to 24%. This includes $0.10 in contribution from the extra week in the fourth quarter and $0.15 to $0.19 in accretion from fiscal 2016 and fiscal 2017 acquisitions. The midpoint of our fiscal 2018 guidance assumes an increase in operating margin of 70 basis points.

As we've discussed with you on recent calls and as seen again this quarter, the commercial and wholesale locations we acquired as part of the McGee & Clark Tire acquisitions operate at a lower gross margin, primarily due to higher sales mix of tires and with respect to the wholesale business, a higher sales mix of tires without installation.

However, these acquisitions also require a lower level of SG&A expenses. Therefore, we continue to expect this change in our sales mix will continue -- will reduce gross margin by approximately 250 basis points and be offset by a similar reduction in SG&A expenses as a percentage of sales until we fully wrap these acquisitions in the third quarter of fiscal 2018.

Importantly, we continue to have a favorable outlook for the industry, and we expect trends will continue to strengthen moving forward. Most beneficial to our business is that total vehicles in operation are expected to grow over the next 5 years with vehicles in our sweet spot of 6 years old and older, representing the vast majority of this growth.

This is in contrast to the pressure on this group over the past several years, including a significant decline in vehicles 6 years old to 10 years old. Additionally, the number of service days is expected to continue its slow steady decline. These trends represent a tailwind to our comparable store sales over the next several years.

Vehicles 13 years and older accounted for 28% of our traffic in fiscal 2017, up from 26% last year, providing further evidence that the average age of vehicles continues to rise. These vehicles produce average tickets similar to our overall average, demonstrating that customers continue to invest in and maintain their vehicles even as they advance in age.

And with that, I'd like to turn the call over to Brian D'Ambrosia for a more detailed review of our financial results. Brian?

Thanks, John. Sales for the quarter increased 10% and $23 million. New stores, defined as stores opened or acquired after March 28, 2015, added $40.8 million, including sales of $35.1 million from fiscal 2016 and 2017 acquisition.

Comparable store sales decreased 8%. Additionally, there was a decrease in sales from closed stores of approximately $1.6 million. There were 90 selling days in the current quarter and 91 in the prior year fourth quarter. Adjusted for days, comparable store sales decreased 7%.

Year-to-date sales increased $77.9 million and 8.3%. New stores contributed $124.3 million of the increase, including $102.5 million from fiscal 2016 and 2017 acquisitions. Comparable store sales decreased 4.3%. Additionally, there was a decrease in sales from closed stores of approximately $8.1 million. There were 361 selling days in both fiscal year 2017 and fiscal year 2016.

At March 25, 2017, the company had 1,118 company-operated stores and 114 franchise locations as compared with 1,029 company-operated stores and 135 franchise locations at March 26, 2016. During the quarter ended March 2017, we added 24 company-operated stores and closed 4 stores. For the full year 2017, we added 105 company-operated stores and closed 16.

Gross profit for the quarter ended March 2017 was $93.2 million or 37% of sales as compared with $91.9 million or 40.1% of sales for the quarter ended March 2016. The decrease in gross margin for the quarter was primarily due to the sales mix shift from recent acquisitions as well as the impact of negative comparable store sales.

During fiscal 2016, we acquired certain tire and automotive repair locations that serve commercial customers and sell wholesale tires to customers for resell. These locations conduct tire and automotive repair activities that are similar to our retail location. Other than with respect to the sales mix resulting from the sale of commercial tires as well as the gross margin of the wholesale locations being different, primarily due to a higher mix of tires sold and the fact that those tire sale do not include installation or other tire-related services that are more common at other locations.

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

On a comparable store basis, gross margin for the quarter ended March 2017 decreased 40 basis points from the prior year quarter, due primarily to the impact of negative comparable store sales.

Gross profit for the fiscal year ended March 2017 was $396.9 million or 38.9% of sales as compared with $385.7 million or 40.9% of sales for the fiscal year ended March 2016. The decrease in gross profit for fiscal 2017 as a percentage of sales was primarily due to the sales mix shift related to recent acquisitions and the impact of comparable store sales.

Additionally, labor costs and distribution and occupancy costs were relatively flat as a percentage of sales as compared to the prior fiscal year.

On a comparable store basis, gross margin for fiscal 2017 decreased slightly as compared to the prior fiscal year.

Operating expenses for the quarter ended March 2017 increased $7.7 million and were $73.1 million or 29% of sales as compared with $65.4 million or 28.6% of sales for the quarter ended March 2016. The dollar increase is primarily due to increased expenses for new stores.

On a comparable store basis, total operating expense dollars in the quarter ended March 2017 declined slightly from the prior year period. We believe that this demonstrates the effectiveness of our strong cost control in a period of soft sales.

For the fiscal year ended March 2017, operating expenses increased by $15.4 million to $280.5 million or 27.5% of sales as compared with $265.1 million and 28.1% of sales for fiscal year 2016. The dollar increase primarily relates to increased expenses for new stores.

Operating income for the quarter ended March 2017 of $20.1 million decreased by 24.1% as compared to operating income of approximately $26.5 million for the quarter ended March 2016, and decreased as a percentage of sales from 11.6% to 8%.

Operating income for the fiscal year ended March 2017 of approximately $116.4 million decreased by 3.5% as compared to operating income of approximately $120.6 million for the fiscal year ended March 2016 and decreased as a percentage of sales from 12.8% to 11.4%.

Net interest expense for the quarter ended March 2017 increased $1 million as compared to the same period last year, an increase from 2% to 2.2% as a percentage of sales. The weighted average debt outstanding for the fourth quarter of fiscal 2017 increased by approximately $110 million as compared to the fourth quarter of last year. This increase is due to an increase in debt outstanding under our revolving credit facility to fund the purchase of our fiscal 2017 acquisition as well as an increase in capital lease debt recorded in connection with the acquisitions.

The weighted average interest rate decreased by approximately 80 basis points as compared to the fourth quarter of the prior year. The weighted average interest rate is lower as compared to the prior year due to a higher amount of debt outstanding under the revolving credit facility in relation to total debt, partially offset by higher LIBOR rates in the fourth quarter of fiscal 2017 as compared to the same period in fiscal 2016.

For the fiscal year ended March 2017, net interest expense increased by $4.2 million as compared to the prior year, an increase from 1.6% to 1.9% as a percentage of sales for the same period. The weighted average debt outstanding for the year ended March 2017 increased by proximately $80 million from the year ended March 2016. The weighted average interest rate for the year ended March 2017 remained relatively flat as compared to the same period of the prior year.

The effective tax rate was 34.5% of pretax income for the quarter ended March 2017 and 36.5% for the quarter ended March 2016. For the year ended March 2017, the effective tax rate was 36.7% of pretax income versus 36.6% for the year ended March 2016.

Net income for the current quarter of $9.7 million decreased 30.5% from net income for the quarter ended March 2016. Earnings per share on a diluted basis for the quarter ended March 2017 of $0.29 decreased 31% as compared to last year's $0.42. For the fiscal year ended March 2017, net income of $61.5 million decreased 7.9% and diluted earnings per share decreased 7.5% from $2 to $1.85.

Our balance sheet continues to be strong. Our current ratio at 1.1:1 is comparable to year-end fiscal 2016. Inventory turns at March 2017 improved as compared to fiscal year 2016.

During this fiscal year, we generated approximately $130 million of cash flow from operating activities and increased our debt under our revolver by approximately $79 million.

Capital lease and financing obligations increased $51 million, due primarily to the accounting for our fiscal 2016 and 2017 acquisitions. At the end of the fiscal year, debt consisted of $182.3 million of outstanding revolver debt and $228.4 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 41% at March 2017 from 34% at March 2016. Without capital and financing leases, our debt-to-capital ratio was 24% at the end of March 2017 and 16% at March 2016.

Under our revolving credit facility, we have $600 million that is committed through January 2021. Additionally, we have a $100 million accordion feature included in the revolving credit agreement. We are currently borrowing at LIBOR plus 100 basis points and have approximately $411 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 complete them quickly.

During this fiscal year, we spent approximately $35 million on CapEx, including 11 new construction stores. This was approximately $8 million in the first quarter, $10 million in the second and third quarters and approximately $7 million in the fourth quarter. We also spent $143 million on acquisitions, which also includes 19 new locations from small 1- to 4-store deals.

Depreciation and amortization totaled approximately $45 million, and we received $3.5 million from the exercise of stock options. We paid about $23 million in dividends.

Now expanding on the guidance for our fiscal year 2018. As John said, we expect sales in the range of $1,125,000,000 and $1,155,000,000. This reflects an increase in comparable store sales of 2% to 4% on a 52-week basis and 4% to 6%, including an extra week in the fourth quarter. Operating margin is expected to increase by 70 basis points at the midpoint of our range.

Interest expense should be about $21 million before any adjustments to true-up acquisition accounting for potential capital leases. EBITDA should be approximately $185 million at the midpoint of our range. Depreciation and amortization should be about $46 million. CapEx should be approximately $38 million. Maintenance CapEx will be about $30 million with the remainder for new store construction.

The tax rate should be about 37.4% for the year with some fluctuations between quarters. This rate is before any impact from excess tax benefits that may be recognized from the future exercise of stock options.

This concludes my formal remarks on the financial statements. With that, I will now turn the call back over to John. John?

Before I turn the call over to the operator, I want to announce that our Board of Directors has approved the change in our corporate name to Monro Inc. Our business have moved well beyond exhaust and mufflers with a number of brand names under the Monro corporate umbrella.

In true Monro fashion, we believe that simple is better and that this change to our corporate name is the reflection of the significant growth and improvements our company has undergone since it was founded. The name change will apply to our corporate entity only and will be voted on by shareholders at our annual meeting in August. If approved, the name will become effective that same month. It is appropriate that this change also marks our 60th anniversary and the year in which Monro crosses the $1 billion sales mark for the first time.

While we still maintain that the bottom line is more important than the top line, this is a significant achievement for our entire team, and I want to congratulate and thank them for all their hard work in getting our company to this point. We look forward to the next 60 years of growth.

And with that, I'll turn the call back over to the operator for questions.

(Operator Instructions) We'll go first to Bret Jordan with Jefferies.

No savings and signage from the shortened name?

That would be a true Monro fashion move.

I guess question on the current quarter, the April, May trends. Could you talk to the more -- a granular about sort of the regional performance, obviously, maybe instead of central state, northeast versus southeast, you talked about a couple of very strong markets, but maybe you could give us some more (inaudible) information? And then product lines, I think you said tires were up, too, but is that pricing or units?

Tires is average ticket. Brakes is up high single digits, that is some units and some ticket. And those are the big categories moving in the first quarter. The -- in terms of regional performance, we pointed out those strong markets. And as I've said, both of the north and the south are comping positive. The south is comping slightly positive. And our weakest areas are in the sort of central for us, so more western state.

Okay, great. The private label card, the Drive Card, is there -- you talked about sort of volume growth with the loyalty, is there any margin impact as you promote around that card?

We freed up some dollars in getting that card as a private label card. So we've got that -- we've got funding for some of the offers that we're putting out here. What we're looking for here is more return business, and we should see higher tickets because this will be a dedicated card for our customers to help repair their car.

Okay. And then last session. As we think about Clark and maybe as the wholesale tire category, obviously, we thought about volume pickup and giving better buying power, but is that probably not going to be flowing through to incremental margin leverage in the near term? It seems like we're seeing maybe some negative EBIT impact in addition to the gross impact?

Well, certainly, early on in any acquisition, we get operating margin pressure, and we're seeing that here. So this is the toughest time frame for that acquisition, which we added in September. What I will tell you is that, that additional volume will help us do a better job, I believe, than others in keeping tire cost increases in check.

(Operator Instructions) We'll go next to Rick Nelson with Stephens.

I'd like to follow-up on the guidance. As I look at the EPS growth rate for the first quarter, 8% at the midpoint of the guidance. Full year, 19% at the midpoint. And if we take out that extra week, we're looking at 14% growth. So a step-up by, I guess, for the remaining quarters and if you could comment on that and what you see as the drivers?

Sure. Sure. If you look at the timing of the acquisitions that we made last year, they -- for the fiscal '17 acquisitions, they -- as all acquisitions, they're diluted in the first 6 months. So they were dilutive last year -- or, in fiscal '17 in the last 6 months. And while they -- while overall they'll contribute all year, that will grow during the year, and we'll obviously be up against those weaker numbers or definition in the third and the fourth quarter. So I think that's the biggest piece of it there.

Yes. Also, these tire price increase of 3% to 14%, how do you see the industry's ability to pass on some of these cost increases, it sounds like with your scale and your buying power, you're going to be able to mitigate some of the external costs. What do you see happening in retail?

Yes. So you can see that we're up -- our average ticket on tires is up 2% in the first quarter. So we're seeing some ability to pass that along already in the first quarter. And I would expect that tire retail prices, consumer prices, would need to go up later in the year to account for the cost increases taking hold more generally. With our increasing volume in our scale, again, what I would expect is that our costs will go up less than others. And that -- to the extent that we are able to pass through some additional above-the-cost increases, that really represents some upside for us. We're -- our base budget is with a 2% hurdle rate accounting for us passing fully basically that increase. And as tire cost increase during the year, that will be a help to comp later in the year, that tire -- additional tire pricing.

Do you use your cost advantage to drive volume or to expand margin?

We will look to expand margin while making sure we drive some units. But we've always -- we've never been the low guy out there, so we'll make sure we remain competitive and try to make some money.

Got you. And finally, if I could ask any update on the DC in the south, are you more likely to greenfield that? Or are there other acquisition opportunities there?

Yes. I've said that we need to be over 100 stores in Florida for that to make sense. We're obviously still not there, and I would look for us to be at that level somewhere north of 100 stores before we put that DC in.

We'll go now to Brian Nagel with Oppenheimer.

First off, not to be too granular here. But if you look at the sales cadence in this -- the first couple of months here of the new fiscal year, so 3% in May -- I'm sorry, 3% in April then a 2% in May, is there anything to reason to that modest deceleration more than just the difficult comparisons month-to-month?

No. I don't view any of our comp comparisons this coming year as difficult. I think incrementally, we're in a better situation. But as I've said, I still have concerns for the consumer. And as we've said in our comments, we're getting some price, which is driving that. So I feel a little bit better about the fact that we're getting some price. But really, I would look to see that through the end of the quarter, see how that plays out through the end of quarter and we can give you the full first quarter and the first couple of weeks of July and then we come out with the first quarter.

Got it. And then, (inaudible) with regard to price, have you -- the guidance you've given for sales growth for the current to current year, of these you mentioned in your prepared comments, that's largely driven on price, with maybe the high end a bit better traffic. So historically, when we see pricing benefits like this, do they tend to stick? Or is there risk around -- if you're looking over the course, let's say, 12 months, is there a risk that something could change and there's pricing dynamics could become less the driver?

Yes. I think that this is -- as I just talked about with Rick, this is cost driven. And tire costs are up, which I think will generally support higher prices through the year. That's really what's different this year versus last. So I think -- and to the extent that price isn't passed through by others, their earnings are going to be significantly impacted, and I think that helps us get acquisitions done if that takes place.

And then just a final question. With regard to acquisitions, again, referring back to the prepared comments, you talked about it, it seems like the -- that the pipeline still quite good. You mentioned, I guess, if you just want to call it a risk that with potential tax legislation out there that some sellers may be holding off. The question I have, is that -- are you seeing that right now? Or is that just a concern that could pop up?

No. I think we're seeing that. I'm not inventing that, no. That's -- that is in part of discussions with sellers. Just like last year with various sellers, we were looking at sellers that believe tax rates were going to be higher at this time. And that's always been a motivation. No one wants to pay the government more money than they have to, especially small business people that has worked hard to build a business.

Yes, Brian, this is Robert. It's typically the bigger deals we're looking at where you're seeing that. The 10- and 20-store deals are moving forward and are not being impacted by that issue.

We'll now take your question from Matt Fassler with Goldman Sachs.

My question relates, just to give some clarity on your expectations for traffic growth through the year relative to the 1Q run rate. It seems like prices is a bigger piece of your -- it's a bigger piece of the equation. And how you're thinking about that in absolute terms and also against the compares that you faced because you're up against obviously some pretty modest compares for the first couple of months and of the first fiscal quarter?

Yes. As I've said, traffic at the high end -- or, our high-end incorporates 1% traffic growth. Otherwise, 2% to 3% price. And as I've said, I think incrementally, we're in a bit of a better place than we were last year at this time, but I don't imagine it worse than it was last year. So I think the price is supported by the cost increases, and we look to traffic as not a part of -- not as much a part of the low end, but certainly, more a part of the high end.

Understood. And then secondly, as we think about weather, obviously, during the winter, weather can be extremely decisive for you, kind of as a current indicator of business. For companies that are dealing much more so under the hood than on the tire side, a warm winter can be an impediment to the following summer, almost regardless of what the summer looks like. Do you expect any hangover for your business from the winter that we've just had? And what kind of weather will change or impact your sales outlook realtime for the rest of the fiscal year, certainly until we get to next winter so, say, thinking now through next fall?

Right, I think that's right. The weather impact for us is about winter. So I don't see any other weather impact that will define the next 6 months. We've given you 7 weeks of data where we've got some positive comps driven by price. So we're -- and I talked about traffic not really being a part of our low end guidance, so I don't think we're looking that as a part of that low end. So I don't see weather as a big differentiator for the next 6 months.

We'll take our next question from Mike Montani with Evercore ISI.

Just wanted to start off, if I could, on the credit card side. Can you just share some incrementals on who the private label partner is? And what the difference is in terms of incremental value that you're offering to your consumer with this versus with the Goodyear deal you had? And then what's the incremental benefit for you all for making this switch economically?

Sure. The partner is Citibank and the incremental -- well, the offers for our customers are discounted oil changes, so we're offering a discount on any oil change, that's put on the card. We think that'll be a big driver of customer loyalty, which, as you know, for us, is very important. We want the opportunity to perform that regular maintenance on our customers vehicles, so we can help them understand what shape their vehicles are in, their brakes, their tires get checked every time they're in our stories. And we go back and do direct marketing to all those customers after. I mean, and this offer on oil changes will help them be more sticky. We have a service discount over a certain dollar amount of spend, which will help our customers pay for any work that's needed that we find during those regular visits. And on the tire side, we are enhancing rebate to draw in some new customers. So those are the offers and how they sort of relate across our business. And really, I guess the difference for us in doing this and having this be our card is that it's exclusive to our brand, and we have much more flexibility in everything that I've just described than we had under a more national program, like a Goodyear program.

Is there any kind of benefits that would accrue to you all if the card was used at third-party retailers or vendors, like a profit share (inaudible)

Not at this time. No, not at this time.

Okay. And the other questions I had were a little bit more housekeeping in nature, but did you give what the monthly comp cadence was for 4Q? And I just missed it, or would you mind sharing it?

Sure. We were down 12 in January, adjusted to down 8, 4 days, then we were down 7 in February and down 5 in March.

Okay. Also, can you share some color about what oil changes did in 4Q? And overall traffic versus ticket on the down 8?

Sure. Traffic was down 5, oil changes was similar and ticket was down 3.

And then with the tires being down 11, was that with the units that have actually been down 12 or 13? Or can you give color there?

Yes. Units were down 9, and we had 2% from some trade down on the ticket side.

Okay. And then what's driven the margin to be positive now on the tire side is basically the fact that you've been able to implement price increases and then presumably better volume in the last 2 months, is that fair?

Yes, we've absolutely had much better volume in the last couple of months, and we've implemented price, as I described, plus 2 in price.

We'll take our next question from James Albertine with Consumer Edge Research.

This is Derek Glynn on for Jamie. You've provided some details in your prepared remarks and online progress you're making. How do you see your digital strategy evolving over time? Any new initiatives on the horizon we can look to? And the pace of investment we could expect in this regard?

No. I've been talking about the, more generally, the work we've been doing to enable technology more globally, and we're funding that out of some saves I mentioned. Associated with that, we were getting some higher rebates and lower cost on parts. We're looking to sell funds. Some of that -- on the advertising and marketing side, we've had a shift over the last couple of years from print primarily to digital, and we continue to make progress there, although obviously broader market conditions and weather can overcome the progress that we're making there. But that shift to digital from print, and, frankly, some shift into CRM from print, will continue in fiscal 2018 with the advent of our new CRM system, and we actually have a new digital agency that's helping us make some additional gains there.

Okay, great. And sorry if I missed this, but can you give us the revenue mix, percentage by segment for the quarter?

Sure. Hang on one second. For the quarter, we were brakes, 14%; exhaust, 3%; steering, 9%; tires, 46%; and maintenance, 30%. Don't hold me to the rounding.

And it appears there are no further questions at this time. I'd like to turn the conference back to the speakers for any additional or closing remarks.

Thank you for your time this morning. In this choppy market, we remain focused on driving profitable sales. At the same time, our team is aggressively expanding our business and scale through acquisition, investing in technology and training to improve our operations and customer experience. All laying the groundwork for sales and earnings growth this year and beyond.

As always, I appreciate your support, and I want to personally thank our team who works to provide outstanding service to our customers every day.

Thanks again. Goodbye.

This concludes today's call. Thank you for your participation. You may now disconnect.