Monro Inc (MNRO) 2018 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Monro Muffler Brake's First Quarter Fiscal 2018 Earnings Conference Call. (Operator Instructions) And as a reminder, ladies and gentlemen, this conference call is being recorded and may not be reproduced in full 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 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 cost 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.

With these formalities out of the way, I'd like to turn the call over to Monro's President and Chief Executive Officer, 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 performance for the first quarter of fiscal 2018.

Before I turn to our results for the quarter, I would like to welcome Brett Ponton, who is joining us on today's call. Welcome, Brett. Brett will join Monro as President on August 1 and assume the role of CEO on October 2. Brett has over 20 years of experience in our industry, managing and growing both franchise and company-operated stores.

In addition to his operational experience, Brett also brings additional consumer marketing expertise to Monro, which I believe will complement our team's current efforts to improve our in-store and online customer experience. I can tell you that he has made a strong initial impression on our associates, and I'm pleased he is with us today on this call.

Brett will share his thoughts on Monro and our industry in a moment. But first, Brian D'Ambrosia, our Chief Financial Officer, and I will review our first quarter results and our updated outlook for the year.

The outperformance of our recent acquisitions, positive comparable store sales, combined with our continued focus on margin improvement drove first quarter earnings per share of $0.55 at the high end of our guidance range after adjusting for $0.02 in management transition costs. The 18% sales increase in the quarter exceeded the high end of our guidance range and was driven by better-than-expected top line performance from our recent acquisitions.

The comparable store sales increase of 1.4% in the quarter was driven by higher overall ticket of more than 3% in both tire and service categories. Strong sales performance in brakes, front end and shocks was offset by a slight decline in alignments with flat performance in both maintenance services and tire sales. As we enter the second quarter, we continue to see positive top line trends with an increase in comparable store sales of 1.5% quarter-to-date, once again led by higher ticket.

As we noted on our May call, we expected to see higher average ticket due to the pass-through of higher material costs, particularly in tires, but we were unsure about traffic trends coming off of 2 consecutive warm winters and continued pressure on the number of vehicles in our sweet spot.

As a result, we focused on sales execution, supported by great offers on our Drive Card credit card, to help motivate customers to perform much-needed maintenance and repairs. We believe we are seeing some traction from our efforts in the brake and front end categories, while many consumers continue to delay tire purchases until this coming winter.

From a geographic standpoint, both our Northern and Southern regions posted positive comps for the quarter with relative outperformance in our Northern and Mid-Atlantic market. In fact, our strongest markets continue to be New Jersey, New York and Maryland, where we saw high single- and double-digit increases in comp sales for the quarter.

Turning to gross margin. First quarter gross margin declined by 120 basis points versus the prior year, primarily as a result of the sales mix impact from the fiscal 2017 acquisitions. On a comparable store basis, first quarter gross margin increased by approximately 110 basis points due to lower material costs as a percentage of sales, reflecting the strength of our purchasing power and our sales execution. Total operating expenses for the first quarter increased $12.4 million and were flat as a percentage of sales as compared to the prior-year period. The increase reflects the addition of 55 net new stores.

On a comparable store basis, excluding management transition cost, total operating expense dollars increased by approximately $2.9 million year-over-year, primarily driven by higher performance-based store manager compensation and a shift of advertising expense marginally to the first quarter from later in the fiscal year, primarily around tests and initiatives to drive sales. We are bringing the most productive of these forward in the year.

While our store managers' bonus plans are based on increasing 4-wall profit, which we saw in the first quarter, I expect to see the level of store manager compensation moderate for the remainder of the year as we adjust staffing levels.

Operating income for the first quarter increased 7.8% to $33.7 million, demonstrating the team's hard work and gross margin store-level profitability and integration of recent acquisitions.

Now I would like to provide a brief update on our customer-focused initiatives. As we discussed on our last call, in March we launched our new private label credit card, the Drive Card, which is replacing a Goodyear-branded credit card. This new bank-sponsored credit card is exclusive to Monro's brands and provides us with complete control over customer-targeted marketing and promotional offers, which we believe will drive greater long-term customer loyalty. I am very pleased that in the first quarter, we processed nearly 10% of our total retail sales on these credit cards, which has already surpassed the 6% of sales we processed on the Goodyear-branded credit card last year. We believe we can double the Drive Card's penetration to 20% of total retail sales, given the sixfold increase in credit card accounts we opened in the first quarter.

At present, our opened Drive Card accounts represent over $120 million in available credit. And this will grow to hundreds of millions of dollars as we continue to open new accounts. Our fiscal 2018 program includes great Drive Card offers, such as discounted oil changes, tire rebates and service discounts, which we believe will drive new customers and more return visits starting this fiscal year. We expect that the Drive Card, along with upgrades in customer communication, in-store video and other sales support, new comprehensive technician training, as well as improvements to our point-of-sale system will help our teams retain customers, drive sales and achieve greater store efficiency in fiscal 2018 and beyond.

We noted these enhancements on our May call, and we are seeing increasing improvements at the store level, which we believe will build as the year progresses, as well as positively impact employee retention. We also see these positive results in our increasing number of customer reviews and ratings.

Further, as we move to implement our new CRM system this year, we are increasingly focused on improving marketing and store execution to customers that represent the greatest opportunity for lifetime value. We are seeing positive results from this focus in our favorable ticket results in the first quarter and also see the impact of this selectivity in our traffic.

Now let's turn to our growth strategy. We are continuing the integration of our fiscal 2017 acquisitions, which outperformed both in sales and profitability in the first quarter. Sales were higher than planned for the retail commercial locations and were even stronger versus planned for the wholesale locations, which took advantage of Monro's tire sourcing and new and expanded delivery routes covering our stores to make additional sales and gross profit. The additional tire unit volume from these acquisitions, about a 25% annual increase, is providing Monro with the ability to mitigate tire cost inflation.

Overall, we believe these acquisitions will continue to improve in profitability as they fully benefit from our scale and integrated supply chain. This will further strengthen Monro's competitiveness in the market and expand our acquisition opportunities to include businesses with integrated retail, commercial and wholesale locations.

I'm also pleased to announce that we have signed definitive agreements to acquire 20 stores, including 8 from an existing Car-X franchisee. These stores fill in our existing markets of Michigan, Illinois and Indiana. The acquisitions are expected to add approximately $13 million in annualized sales, representing a sales mix of 95% service and 5% tires. 12 of these stores will operate under the Monro name and the remaining 8 will continue to operate under the Car-X brand. The acquisitions are expected to close this quarter and will break even for the fiscal year.

Our pipeline of acquisitions remains robust, with more than 10 NDAs signed, each of them representing between 5 and 40 stores within our existing markets. However, we continue to see larger transactions being put on hold, at least until the beginning of 2018, awaiting potential tax reform.

We are also continuing our greenfield expansion with a goal of opening 20 to 40 stores per year. In the first quarter, we opened 7 locations, and we expect to open another 7 locations in the second quarter. This is on top of the 30 greenfield locations we opened in fiscal 2017. As a reminder, greenfield stores for us include new construction as well as the acquisition of 1- to 4-store operations. These locations are expected to add approximately $1 million each in annual sales.

Turning now to our outlook. We expect total sales in the second quarter of fiscal 2018 to be in the range of $278 million to $285 million, representing an increase of 13% to 16% year-over-year. This is based on an increase in comparable store sales of 1% to 2.5%. We anticipate second quarter diluted earnings per share to be in the range of $0.52 to $0.56, including $0.02 in management transition costs. In light of comparable store sales trends fiscal year-to-date, we now expect fiscal 2018 comparable store sales to increase 1.5% to 2.5% on a 52-week basis, or 3.5% to 4.5% when accounting for the 2% comp sales benefit from an extra week in the fourth quarter. This compares to previous guidance of 2% to 4% on a 52-week basis.

The lower fiscal 2018 comp guidance is offset by higher-than-expected sales in the first quarter and the incremental top line contribution from today's announced acquisitions. Therefore, we now expect fiscal 2018 total sales of $1,135,000,000 to $1,155,000,000, representing a 12% increase year-over-year at the midpoint of the range.

For the fiscal year, we expect that a higher realized ticket in tires, largely driven by the pass-through of higher cost and improved in-store sales execution, will lead to sustained increases in our overall average ticket year-over-year. Further, we are hopeful that we will finally see some normal winter weather, which would be positive for our tire unit sales. We also believe that sales in the second half of the year will benefit as consumers meet their health care deductibles.

Our fiscal 2018 guidance incorporates a cost increase for tires and oil combined, which we believe is lower than that experienced by the majority of our competitors. Our guidance reflects higher cost for tires, partially offset by lower oil costs. Please note that these lower oil costs begin to take hold in our second quarter.

Over the past 3 months, we've seen tire manufacturers offering greater off-invoice rebates as a result of raw materials declining from recent highs and soft sell-through of tires. We no longer expect additional tire cost increases this year, whereas we had provided for at least one increase in the second half of the year in our prior guidance.

Given these updated assumptions, we now expect to generate operating leverage on a comparable store sales increase above 1.5% on a 52-week basis. This leverage point is 50 basis points lower than the 2% we guided to last quarter and offsets the impact of lower annual comparable store sales guidance.

With that said, let me remind you that every 1% increase in comparable store sales above this 1.5% threshold generates an incremental $0.08 in EPS for the fiscal year, excluding the extra week. We also expect to incur approximately $0.06 in incremental costs in fiscal 2018 related to the management transition. This includes the $0.02 that we incurred in the first quarter, $0.02 we have guided to in the second quarter and $0.01 in each of the third and fourth quarters.

For the fiscal year, we now expect earnings per diluted share to be in the range of $2.05 to $2.20, representing a 15% increase year-over-year at the midpoint of the range. This compares to our previous guidance of $2.10 to $2.30. The earnings guidance continues to include 10% -- to include $0.10 per share in contribution from the extra week in the fourth quarter and $0.15 to $0.19 in accretion for the recently completed and announced acquisitions. Please note that our fiscal 2018 guidance does not assume any future acquisitions or greenfield store openings.

Lastly, as we've discussed with you on recent calls and as seen again this quarter, the commercial and wholesale locations we acquired as a part of the McGee (inaudible) acquisitions in fiscal 2017 operate at a lower gross margin than our retail locations, primarily due to a higher sales mix of tires, and, with respect to the wholesale locations, a higher sales mix of tires without installation. However, these acquisitions also require a lower level of SG&A expenses.

In our first quarter, the improvement in comparable store gross margins and higher operating expenses somewhat masked this impact. However, we continue to expect that this change in our sales mix will reduce second quarter gross margins and be offset by a reduction in SG&A expense as a percent of sales until we fully lap these acquisitions in the third quarter. Also, because these acquisitions are recent, they are still dilutive to overall operating margin this year.

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

Thank you, John. Sales for the quarter increased 18.4% and $43.2 million. New stores, defined as stores opened or acquired after March 26, 2016, added $41.5 million, including sales of $34.8 million from fiscal 2017 acquisitions. Comparable store sales increased 1.4%. Additionally, there was a decrease in sales from closed stores of approximately $1.3 million. There were 90 selling days in both the current quarter and the prior year's first quarter.

At June 24, 2017, the company had 1,119 company-operated stores and 114 franchise locations, as compared with 1,064 company-operated stores and 134 franchise locations at June 25, 2016. During the quarter ended June 2017, we added 7 company-operated stores and closed 6 stores.

Gross profit for the quarter ended June 2017 was $112.9 million or 40.5% of sales as compared with $98.1 million or 41.7% of sales for the quarter ended June 2016. The decrease in gross margin for the quarter was primarily due to the sales mix shift from recent acquisitions.

During fiscal 2017, we acquired certain tire and automotive repair locations that serve commercial customers and sell wholesale tires to customers for resale. These locations conduct tire and automotive repair activities that are similar to our retail locations, 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 the higher mix of tires sold and the fact that those tire sales do not include installation or other tire-related services that are more common at other locations.

On a consolidated basis, labor costs decreased as a percentage of sales due to the impact of the sales mix shift from recent acquisitions. Distribution and occupancy costs decreased moderately as a percentage of sales from the prior year as we gained leverage on these largely fixed costs with higher overall sales.

On a comparable store basis, gross margin for the quarter ended June 2017 increased approximately 110 basis points from the prior year quarter, due primarily to lower material costs as a percentage of sales.

Operating expenses for the quarter ended June 2017 increased $12.4 million and were $79.1 million or 28.4% of sales as compared with $66.8 million or 28.4% of sales for the quarter ended June 2016. The dollar increase is primarily due to increased expenses for new stores and fees related to the management transition.

On a comparable store basis, excluding management transition costs, total operating expenses increased approximately $2.9 million, primarily due to increases in performance-based manager pay and the timing of advertising expense. Operating income for the quarter ended June 2017 of $33.7 million increased by 7.8% as compared to operating income of approximately $31.3 million for the quarter ended June 2016 and decreased as a percentage of sales from 13.3% to 12.1%.

Net interest expense for the quarter ended June 2017 increased $1.3 million as compared to the same period last year and increased from 1.9% to 2.1% as a percentage of sales. The weighted average debt outstanding for the first quarter of fiscal 2018 increased by approximately $69 million as compared to the first quarter of last year. This increase is 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 our fiscal 2017 and fiscal 2018 acquisitions and greenfield expansion.

The weighted average interest rate increased by approximately 30 basis points as compared to the first quarter of the prior year. The weighted average interest rate is higher as compared to the prior year mainly due to interest on capital lease and financing obligations, coupled with higher LIBOR and prime interest rates in the first quarter of fiscal 2018 as compared to the same period in fiscal 2017. The effective tax rate was 37.2% of pretax income for the quarter ended June 2017 and 37.9% for the quarter ended June 2016.

Net income for the current quarter of $17.6 million increased 5% from net income for the quarter ended June 2016. Earnings per share on a diluted basis for the quarter ended June 2017 of $0.53 increased 6% as compared to last year's $0.50. Excluding the $0.02 per share in management transition costs, earnings per share on a diluted basis for the quarter ended June 2017 increased 10% as compared to the quarter ended June 2016.

Now turning to our balance sheet. Our balance sheet continues to be strong. Our current ratio at 1.0:1 is comparable to year-end fiscal 2017. Inventory turns at June 2017 improved as compared to year-end and the first quarter of last year. During the first quarter of fiscal 2018, we generated approximately $41 million of cash flow from operating activities and decreased our debt under our revolver by approximately $24 million. Capital lease and financing obligations increased $6 million, due primarily to the accounting for our fiscal 2017 and 2018 acquisitions and greenfield expansions.

At the end of the first quarter, debt consisted of $158 million of outstanding revolver debt and $235 million of capital leases and financing obligations. As a result of the fiscal 2018 pay-down, our debt-to-capital ratio, including capital leases, decreased slightly to 40% at June 2017 from 41% at March 2017. Without capital and financing leases, our debt-to-capital ratio was 21% at the end of June 2017 and 24% at March 2017.

Under our revolving credit facility, we have $600 million that is committed through January 2021. Additionally, we have $100 million of an accordion feature included in the revolving credit agreement. Effective July 2, 2017, we are borrowing at LIBOR plus 125 basis points, up from 100 basis points during the quarter ended June 2017. We have approximately $425 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 that makes it easy for us to complete them quickly.

During this quarter, we spent approximately $6.7 million on CapEx and $4 million on acquisitions as part of our greenfield expansion strategy. Depreciation and amortization totaled approximately $11.8 million. And we received about $700,000 from the exercise of stock options. We paid about $6 million in dividends.

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

Thanks, Brian. I am very excited to join the Monro team. I recognize that opportunities like this do not come along very often, and I am thrilled to be here.

As John mentioned, I've been in the tire and auto service industry now for over 20 years, including leading Goodyear's company-owned tire and service centers; followed by my role of CEO of Heartland Automotive, the nation's largest operator of Jiffy Lubes, where we followed an aggressive acquisition strategy; and most recently as CEO of American Driveline Systems, the parent company that is the franchisor for over 700 AAMCO and Cottman Transmission & Total Car Care locations.

I believe my experience in running 3 automotive service formats provides me with a strong foundation as I join the Monro team.

I'm very optimistic about the future of the automotive services industry, and I believe Monro is very well-positioned to capitalize on the very positive industry trends we will see over the next few years.

The total vehicles in operation are expected to grow significantly over the next 5 years with the vast majority of that growth coming from vehicles in our sweet spot of 6 years or older. This is in contrast to the pressure on this group over the past several years, including a significant decline in the number of vehicles 6 to 10 years old. We expect that this trend in vehicles 6 years old and older will benefit our fiscal 2019 and beyond in particular, while this year remains pressured.

Another important driver is that vehicles 13 years old and older accounted for about 30% of Monro's traffic in the first quarter of fiscal 2018. That's up from 28% in fiscal 2017, providing further evidence that the average age of vehicles continues to rise. Average tickets for these vehicles remain similar to our overall average and were up 2% year-over-year in the first quarter, demonstrating that customers continue to invest in and maintain their vehicles even as they advance in age. Vehicles are certainly more complicated today than ever before and, due to the increased adoption of technology in vehicles, that trend will continue. This will drive more consumers to outlets they trust to provide their maintenance, tires and service for their vehicles and will pressure smaller competitors in making the investments needed to keep up with these changes.

And finally, our industry is still very fragmented, creating significant opportunities for large retail chains to continue to grow via acquisition. One of the many reasons I elected to join the team at Monro is I believe this company is very well-positioned to capitalize on these positive trends in our industry.

With a strong 60-year history, I believe Monro has developed a solid reputation in the marketplace for delivering good value to consumers with a strong retail presence in the markets it serves today. I'm also a strong advocate of Monro's business model, which has positioned the company as a cost leader in the industry, leveraging a strong supply chain, coupled with a highly accretive acquisition strategy. This has clearly proven to deliver significant growth over the years. And I would like to thank John for the tremendous job he has done getting the company to this point.

While my first official day at Monro is not until August 1, I've already started spending time in Rochester with John and the rest of the senior leadership team. We have been reviewing current plans in setting the stage for my first 90 days with the company. As I work through my initial assessment, my near-term focus will be on helping to advance the company's business strategy.

First, continue to aggressively pursue add-on acquisitions using a highly disciplined approach.

Second, maintain Monro's cost leadership position as we look to further leverage our scale and integrated supply chain.

And lastly and importantly, build upon the team's current initiatives with respect to the customer experience, store operations as well as marketing, in order to drive organic growth in over 1,100 locations.

I have successfully executed similar strategies in the 3 companies I previously ran, and I intend to do the same at Monro. I bring a consumer marketing and store operations orientation to the business, which I believe will be beneficial as we focus on driving profitable growth both organically and through a disciplined acquisition strategy.

Of course, there's still a lot for me to learn about the business. And beginning in August and over the next 90 days, I'll be spending considerable time in the field with senior leadership. I intend to visit a significant number of markets across our 2 store formats as well as spend time with our wholesale and commercial tire businesses.

On the October earnings conference call, I look forward to updating you on our team's continued progress in these areas as well as my thoughts on where our greatest opportunities lie.

This is an exciting time to join the company, and I look forward to leading Monro on its next phase of significant growth.

With that, John, Brian and I would like to take your questions. Operator, please go ahead.

(Operator Instructions) Our first question is from Bret Jordan with Jefferies.

I guess my first question is for Brett, I guess. And as a guy who's sort of new to it, and obviously you've kicked the tires a little bit, literally and figuratively, but we have seen a sustained trend of negative comps, and I guess we haven't seen a full year of fiscal positive comp in 5 years, yet you signed a contract that seems to have an option strike price at 30% above the trading price when you came on. I think it's $65. So I guess, could you maybe give us some quick color as to what you see, I guess looking on the outside, to change the comp trend and to get your option strike price to make sense, I guess? Quick overview, what was the crystal moment that made you take the job and sign that deal?

Well, clearly, I've been in the automotive space for a while now. And as I mentioned in my comments, I'm very bullish on our industry. Vehicles in operation continue to grow. There's plenty of upside, I believe, in our business related to just the macro growth that we're seeing, Bret.

I think, given the fact that Monro has tremendous scale, given 1,100 locations, certainly positions it well, I think, to do very positive things in the marketplace.

And as relates to comp sales, my orientation is going to be very focused on in-store operational excellence and marketing. And I think, given that orientation over the next 90 days, I intend to dig in, work very closely with the team to develop a roadmap going forward. Having been a competitor of Monro's in the marketplace, I think they've done quite well in the space. They have a good reputation.

I will say this: From previous businesses that I've run, we've seen similar stress, I think, on comp sales as it relates to -- especially in the Northern markets. So I don't believe that Monro is somewhat unique in that area. But again, I'm also very encouraged by the initiatives the team is already working on as it relates to technology investments and the online experience. I think investments in point of sale, as well as the CRM investments, I think those are clearly platforms where I intend to build on, all in an effort to drive, I think, organic growth on a comp sale basis.

I guess in the near term, I guess there's no real shift in the M&A strategy? I mean, John commented that we are north of 10 NDAs signed, and you don't see pulling back on the growth as you familiarize yourself with the business?

Well, I think what's part of -- again, you mentioned the strike price, or the option price. One of the reasons why I'm excited about joining here is the highly acquisitive nature of the business model. I mean, that's a big driver of why I'm here. And I've had similar experience in my days at Jiffy Lube, where we were a consolidator of the oil change segment, if you will. And certainly I'm a big fan of that model. And I recognize that Monro certainly has tremendous room there in that area. Certainly I am not going to slow that strategy down. I'm excited that John has built a nice pipeline here. And if anything, we'll work over time to try and accelerate that, if anything.

What's your take on Monro as an acquisition candidate now that you're trading at a multiple below where a lot of the deals have gone lately, whether it's Precision Tune or Pep Boys or Express Oil or some of the other strategic and financial buyers that have been active behind the scenes in the last couple years?

Look, I don't know if I have a point of view on that today. Certainly, I think I would see the company as being undervalued at this point, clearly. Look, I recognize that my focus in the first 90 days here is to get engaged with the team, understand the business and develop a forward strategy that I think will translate into top line growth, bottom line growth, and the valuation will take care of itself.

Great. I'll stop with the tough questions. And John, just a couple questions. I got on a couple minutes late from another call. You were talking about the regional performance in the North and the South were up. Did you say how much the Central states were down?

No. They're included in the North. And they certainly offset some of the positivity that we saw in the Northeastern markets.

Okay. And then did the cadence of the quarter -- did you give the months?

I didn't. Do you want me to?

Yes, please.

Okay. April was plus 3%, May was plus 1%, and June was up 20 basis points. And July is up 150 basis points.

Okay. And then I guess in the tire comp, maybe this -- you broke this out before I got on. I missed maybe 5 minutes. Did you do units versus price? Because we had a little bit of a price increase, obviously, from a couple of manufacturers.

Yes. We said that average ticket was up a little over 3% and that sales were flat in the category. So units were down about 3%.

Okay, great. John, you're on the fourth quarter call, right? Are you on the...

Yes, I -- I'm not sure yet, but we'll see how -- the transition and that. But I'm around for 6 months after my contract is up.

We're not done with you yet.

I will certainly be a part of all that prep, but I want to make sure that Brett has room to, you know, run the business.

We'll take our next question from Rick Nelson with Stephens.

Welcome to Brett on this call. I'd like to learn a bit about the acquisition environment. Some of your peers are paying big multiples. Brett had mentioned that. Is that pushing up seller expectations and views that there's a need to (inaudible) rethink some of the multiples that you're willing to pay?

Yes, I guess let me take that for what we have -- for what we've done to date here and the negotiations that we have in process. It certainly hasn't changed the multiples for the acquisitions that we've gotten done, including the couple that we announced this quarter. So the smaller deals, no. We've talked about in the past that obviously prices for larger deals are being somewhat impacted by that. But as you know, we bring a tremendous amount of synergies to businesses that we acquire, and I think that continues to be a -- something that the board will need to consider as we go forward and evaluate individual opportunities.

You certainly see us -- you've seen us interested in significant opportunities, and that interest is not waning at all. We still have a lot of capability to get larger deals done and a lot of interest there.

Also, I noticed that the head of store ops is leaving, retiring. Is that a position that you plan to fill?

No. Craig has had a successful 40-year career. It was the right time for him to retire later this year. And we've been building the field operations team around our divisional Vice Presidents, and we'll continue to do that. In fact, this is -- the structure that we'll have right now is a structure that we had 2 years ago. So we'll have those DVPs report directly to the CEO.

And finally, if I could ask you, to tie this up, the impact you see from Amazon pushing into the tire category and maybe your relationship with TireRack? You've competed with them for a while now. (inaudible) and discuss some of the economics there.

Yes, sure. All right. Let me make some comments about online tire sales. I think the first and most important thing is that you need professional installers to put tires on. It's nice to be wanted, but it's even nicer to be needed. So we're not going anywhere.

The installations that we perform for these customers are profitable and they're high margin. And over 50% of those customers are new to our database, and we retain them at the same rates that we retain other customers. Our average ticket on those installation customers is about $120, which compares to an overall average ticket of $160. And again, that's higher margin.

Online tire sales are about mid- to high single digits of tires sold in the country, despite 20 years of solid competition, like you said, with TireRack. So it's limited, and I think it will continue to be limited, even though it will grow for one really important reason. And that's because we see customers' needs for new tires first in our shops. And that's a huge advantage. We train to that. Also, relationships matter. Consumers like to talk to a professional about what tires are best for them and for their family's safety.

When you look at the economic side of it, our tire prices are generally competitive with online sellers. Including shipping and installation, we're only about 5% to 6% higher on average than leading online players like TireRack, TireBuyer. And that's for our top SKUs. And within that, obviously there's significant variations between zip codes and between tire lines, but that's where the average is. And we're probably another 5% to 6% higher than Amazon. And that's a lot lower than some of the percentages that I've heard out there. And that's based on us looking at our top SKUs.

So importantly, I think, we're profitable at any of those online tire pricing levels. So I think recent concern is somewhat overdone. And what I expect is that we're going to continue to install for online sellers, including Amazon, to gain new customers and the related sales. We'll continue improving our online marketing and online shopping experience with a new site that we'll have out by the end of this year. And we'll continue working on that sales execution within our stores, because again, we see the customers' need for tires first, and we match online pricing. And we want to make sure that, for those customers that are looking to try to save a few dollars, that they understand that they can shop with us. And they can get their tires put on today instead of waiting for them to be shipped.

The other thing I think is important is, when you look at profitably selling tires online, distribution is a huge piece of it because tires simply cost a lot of money to ship around. We have 1.3 million tires out in 1,100 stores and warehouses. And that is a really significant strategic asset that we've been looking at how to leverage. And I know Brett is committed to continuing to look at how to leverage that. In fact, we're in the very early stages of a test that we're running to leverage our tire inventory online with an online partner. So we'll -- as we go through that, we get some results, we work that out, we'll talk more about that.

So I guess, like any significant trend that requires investment in marketing, digital, training and distribution, this trend favors larger chains. And any pressure from it will expand our acquisition opportunities. So for me, the important pieces are you need tire installers, we see the need first, we've got many ways to react to this and continue to grow our business.

Our next question comes from James Albertine with Consumer Edge.

Congratulations to Brett, I wanted to add that as well. And then, if I may, I know, John, you're going to be around for a little bit, but in case we don't get the opportunity, thank you for all your work and everything you've done for Monro, and as well to Rob Gross, if he's listening. He's been great over the years, and we'll miss both of you.

But certainly, Brett, thank you for the overview you provided earlier. If I may maybe ask a follow-up to the question that previously was asked. As you're looking at the dials and the different levers you can pull across the portfolio, and given your understanding, it seems the markets nationwide for service and tire vendors, the comp trajectory, the demographics, things of that nature, where, if anywhere, do you see the opportunity to sort of dial up, whether it's acquisitions or investments in technology, sort of dial up Monro's efforts near term? And how should be think about sort of the ethos that you're going to sort of bring to bear? Is it one where growing into new markets faster makes a lot of sense despite some distribution efficiencies? I just want to understand kind of if there's going to be any shifting, incremental even, with respect to the sort of culture or trajectory of the company?

I think, maybe just to reinforce some of the comments I made earlier, I'm fully committed to the current strategy at Monro and leveraging our vertically integrated supply chain, all the benefits that, that provides. So certainly, add-on acquisitions in existing markets will be a priority. But also I'd say, and I think that's also consistent with the current company strategy, that there is high desire to grow in more attractive, maybe Southern markets that we see a little higher growth rate. And so I think certainly as we continue to build out the M&A pipeline, if you will, geographic expansion around the South I think will be a key focus for me and the team as one area.

As it relates to dials or levers to pull, I think, as I shared before, I'll come and work with the team, use them to be more of a marketing operations orientation, with the firm belief that we can leverage technology to create better experiences for consumers out-of-store, in-store and improve the post-sale experience as well. I have had a tendency in the past to focus a lot on in-store conversion with product mix enhancements, which would drive, I think, a discussion and work with the team around package selling, the good, better, best value propositions, et cetera.

But until I get a much deeper understanding of the current state across our markets, I'd like to reserve a little more granular comments on that until the October call. But certainly, I think those will be 2 areas that we'll be focused on: one on the organic side; and certainly, on the M&A side, will be a continuity play in terms of current strategy with an emphasis on looking to expand in the more attractive Southern regions.

And absolutely understand that you've only been there for a little bit. Did you have input into the updated guidance at this point?

Well, technically I haven't started with the company, Jamie. But it will be August -- but yes, John and I and Brian and the team have had an opportunity to go through at great length the guidance. And certainly I have a high degree of confidence in Brian and John's view on this. I've kind of worked through that with them as a team, and I'm comfortable with the guidance they've provided, or that we've provided, I should say, and I'm certainly committed to do that guidance.

Very good. And then, John, if I may ask one more, I think I heard you on the prepared remarks talk about some of your acquisitions, the 20 stores, including the 8 Car-X; Michigan, Illinois, Indiana. 95% service, 5% tire mix? Did I hear that correctly?

Yes, you did. So we have a real opportunity there.

And as you look at the landscape for growth, and maybe even using your NDAs as a proxy of that landscape, is it a similar mix of service and tires?

I'm sorry. Could you ask that again?

Yes. So as we're thinking about the acquisition landscape and your sizing up your shopping list, as it were, do you see a similar mix in terms of the revenues generated from service relative to tires?

Yes, when you look at the NDAs collectively, they much more represent our global retail sales mix, which is in that 40-ish percent tires.

Our next question comes from Matthew Fassler with Goldman Sachs.

This is Chandni Luthra on behalf of Matt Fassler. Most of my questions have been answered, so I'm just going to ask some very basic ones first. Could you guys provide the missing pieces of guidance? Are we to assume items like D&A, CapEx, interest, are they all sort of consistent with what was guided in your fourth quarter?

Yes. Yes, we -- the primary adjustments to the guidance were for some costs. So yes, that other guidance remains very similar.

Great. And then just on the lines of the previous question in terms of the acquisitions activity, so your acquisition activity was basically negligible in the first quarter. And you briefly talked about tax reforms and sort of there being a hold-up. And what you announced in 2Q is partly driven by Car-X. Are we to sort of assume that, given we are in a positive comp environment this year, should be assume a meaningfully lower acquisition activity versus FY '17?

You also touched upon multiple sort of [rerating] higher with Precision Auto Care and a bunch of other deals out there. How should we think about the overall landscape versus FY '17, wherein obviously acquisition activity was very robust?

Yes, I think we've talked about it. The smaller acquisitions we will continue, I think, to make progress on. And maybe some of the larger deals do get put off to late in our fiscal year. So we would still consider those within the fiscal year, and I think there's some opportunity there.

Our next question comes from Scott Stember with CL King.

Welcome aboard, Brett.

Thank you, Scott.

Can you maybe talk about the guidance? I know that a big chunk of the reduction in guidance related to the transition expense, but it looks like the comp guidance is coming down a little bit as well. Could you just talk about what went into that thinking? I know that you said that June things pared off a little bit. It seems to have come back in July. But what are you guys thinking? And also, how does that weigh versus the fact that the first half of the year is going up against very, very easy comparisons and then things get more difficult, I guess, in the back half of the year? Maybe just talk about that a little bit.

Sure. Yes, I -- we adjusted the guidance to basically what we've run on the low end to what we've run for 4 months. And on the high end, that reflects what I think is a reasonable expectation for getting some help out of some weather after 2 seasons of very warm weather in the last 2 winters and the opportunity here for the consumer to improve in the second half of the year as they deal with some of their health care -- of their health care costs.

And John, did you give what the traffic was for the entire company?

Yes, the traffic was down 2%.

Down 2%. Great. All my other questions have been answered already.

We'll take our next question from Carolina Jolly with Gabelli.

Just really briefly, can you review any factors that you think affected the quarterly cadence? I mean -- yes.

So specific factors that affected the quarterly cadence, you know, I think, like we said, there was -- we had questions about traffic coming off of the -- coming off of another warm winter. I think everyone saw a little bit of improvement around the April time frame and then some deceleration as the quarter went on. So, I mean, as I described even on our last quarter call, I think things are incrementally better than they were last year. And certainly we're trying to do everything we can with customers to retain them and, at the store level, to execute on the sales side.

But I'm pleased to see that, while the first quarter sort of decelerated, we have comps back at, at least 150 basis points in July. And I know Scott asked about the second half of the year maybe being more difficult. I didn't mean to ignore that. If you take a look at the back half of the year, the 6 months, and you look at the run rate, it's not that different than the average run rate for the first half of the year. Certainly we got some help from some snow in December, but we had a very difficult fourth quarter, like many other businesses in our region.

So when you look at the back half of the year, I think the combined comp is down 4 something. So it's not that much different from the first half of the year, apart from a bit of a different cadence. We ran up 1%, adjusted for days in the third quarter, and then have a real opportunity with down 8%. And I don't view the up 1% as a really significant hurdle given any kind of winter weather. Especially, I think, the opportunity is significant in November.

Okay, perfect. And then secondly, I guess I was expecting SG&A expense to be a little lower. Can you expand on some of the initiatives, the sales initiatives that you mentioned in your comments? And should we kind of expect those to moderate by the third quarter?

Yes. I think, as I said in my prepared remarks, number one, we have performance-based pay plans for our store level and our executive management teams. So those were certainly expenses we didn't have last year, starting out very difficult. So a big chunk of that is just our performance plans. And the job we did on margin, it doesn't show up in the comps, but the job we did on margin drove, obviously, a bunch of contribution which gets those guys paid.

We also, as I said, we were focused on the sales effort. And so we added some headcount earlier in the year. And we are currently adjusting that back from what we see as what we need to go forward, do the right job with the customer and run the business well, consistent with our cost focus. So we're making those adjustments. And as I said, I expect that to moderate as the year goes on.

And that concludes today's question-and-answer session. I'd like to turn the conference back over to John Van Heel for any additional or closing remarks.

Thank you all for your time this morning. 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 acquisitions, 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.

I'm extremely grateful that I've spent 15 years at Monro, an honor to have had the opportunity to lead this great company for the last 5, working together to create opportunities for our employees and solid returns for shareholders.

As always, I appreciate the support I received from colleagues and shareholders. I want to personally thank our team for their hard work, dedication and consistent execution.

And finally, I want to congratulate Rob Gross on his retirement and thank him for his outstanding leadership and many contributions to the company over his 18-year tenure. Thanks again, and have a great day.

And that concludes today's presentation. Thank you for your participation, and you may now disconnect.