Monro Inc (MNRO) 2018 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Monro Incorporated Earnings Conference Call for the Third Quarter Fiscal 2018. (Operator Instructions) And as a reminder, ladies and gentlemen, this conference call is being recorded and may not be reproduced in whole or in part without permission from the company.

I would now like to introduce Ms. Effie Veres of FTI Consulting. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us on this morning's call. I would just like to remind you that on this morning's call, management may reiterate forward-looking statements made in today's release.

In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks and uncertainties related to these statements, which are more fully described in the press release and the company's filings with the Securities and Exchange Commission.

These risks and uncertainties include, but are not necessarily limited to, uncertainties affecting retail generally, such as consumer confidence and demand for auto repair, 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, Brett Ponton. Brett, you may begin.

Thanks, Effie. Good morning, everyone. I'd like to welcome you to Monro's Third Quarter Fiscal 2018 Earnings Call. I would like to start with a brief overview of our third quarter results followed by an update on the progress we've made on our strategic initiatives. As expected, comparable store sales were volatile throughout the quarter ending with a decline of 3%.

As was the case last quarter, negative traffic was partially offset by higher year-over-year ticket. This was particularly true as we lapped an increase in comparable store sales of 15% in December of last year. To provide you with additional color, our monthly comparable store sales were negative 3% in October, negative 1% in November and negative 5% in December. From a regional perspective, we once again saw an outperformance in our southern markets as compared to our northern markets with our stores in the south comping positive in the quarter.

When we look at sales by category, as provided in this morning's press release, we saw declines across the majority of our service and repair categories. In our largest category, tires, we experienced a decline of 4% in comparable store sales, reflecting a decline in (inaudible) of 5%, which were not surprisingly led by declines in December. This was partially offset by a 1% higher average ticket in the quarter. We also continued to see consistent and irrational retail tire pricing across their major markets.

In our fiscal month of January, which started on December 24 and ended on January 20, comparable store sales have improved to an increase of 1% or 2.5% when adjusting for the holiday calendar shift. And thus far, in our fiscal month of February, our retail comps have accelerated and are up approximately 4%. The holiday calendar shift in January reflects the shift to the Christmas and New Year's holidays from Sunday to Monday. This is a headwind for us given that our sales on a Monday are, on average, 2x higher than a Sunday, which is our slowest sales for the week -- slowest sales day of the week, given that approximately 1/3 of our store base is closed.

While third quarter results on an adjusted basis were in line with our internal expectation, these results are far from where we want them to be. We know we can do better, and we have moved quickly to launch a number of strategic initiatives that will get us there. More specifically, since our last earnings call, we have completed a rigorous business assessment, which has further highlighted the significant opportunity we have for improvement, particularly as it relates to our in-store execution. As we previously discussed, we believe that by delivering a high-quality and consistent experience to our customers, we can improve customer retention and over time, drive higher customer lifetime value. This will enable us to drive traffic back into our stores, which we believe will lead to sustainable growth in comparable store sales and higher profitability.

Based on our findings, we have developed a game plan to strengthen our 5 areas of focus, which include: store operations; marketing; our teammates; omni channel; and acquisitions. While we have made progress across all areas, there are a few important initiatives that I would like to highlight. Starting with our first strategic area of focus, store operations. One of the most critical initiatives underway is providing a consistent best-in-class experience to our customers across our over 1,100 company stores. To achieve this, we've kicked off our store operational excellence initiative we fittingly named Monro Forward. This key initiative focuses on setting brand standards for how we look and how we operate.

First, on how we look. Monro is a company that has grown through decades of acquisition activity, which has resulted in a store base that includes a wide range of store sizes and configurations. Our objective is to drive consistency in our store appearance and store layout across our markets and store formats regardless of structural differences. The outcome will be a light store refresh, which modernizes our store appearance and establishes clear standards for our retail banners. This fresh and modern look will carry into the store and extend to visual merchandising and customer amenities. We will also update how we communicate in-store with our customers by simplifying and updating materials such as service estimates, invoices and inspection forms so we can better inform our customers about their automotive needs and the service options available to them. Additionally, at some point in the future, we'll also introduce an interactive tablet for our customers that can further aid and streamline the sales process and enhance our customer experience.

We are currently in the process of segmenting our stores by format and size to determine the investment and timeline required for this light store refresh, which we will share with you on our next earnings call in May.

How we look also extends to what we sell. We want to optimize our product mix in our tire category. When we reviewed our tire assortment, we took a more granular approach to category management, and we identified considerable gaps in our tire offering, particularly in our mid- to higher price points. To address this in the near term, we have already started to make changes to our mix. However, to truly optimize our tire assortments, we will align every store's inventory to its local demographics and vehicle population so we can truly offer our customers the right tires at the right price. We will also optimize this updated tire mix through clearly defined good, better and best product options.

To support this stronger merchandising strategy, we are working with a point-of-sale partner to evaluate our in-store product materials and visual merchandising and refine our selling approach so that our teammates can properly educate consumers on the benefits across our good, better and best product options. The combined effect will be to maximize our ticket and drive higher conversion to an improved customer experience and merchandising strategy.

Turning to how our stores operates. We want to get it right the first time every time. That means setting high standards of performance for our teammates. This starts with understanding the critical moments in-store that separates a good customer experience from a bad one. We will leverage best practices from both inside and outside Monro to help us define those moments and the in-store procedures and practices that we want our teammates to follow. Our objective is to ensure that we deliver a best-in-class experience to every customer at every store, every day. This new playbook will be supported with new training for our teammates delivered through a cloud-based learning management system. Our playbook will also define the roles and responsibilities of our teammates in-store, which will set the foundation for a new career development plan at Monro, which I will discuss in a moment.

We believe these actions will ensure that our teammates are well trained to assist, educate and address our customers' needs, providing an in-store experience that is worthy of our customers' trust and long-term patronage.

To ensure we reach our objectives, we are increasing transparency and accountability throughout the organization by providing the right tools to our field managers so they can enact real change at the store level. To do this effectively, we are investing in and leveraging technology. We are currently testing new handheld electronic tablets with software designed specifically for our industry. These will allow our field managers to evaluate and manage their store's performance across key performance indicators. These include the ability to track traffic, sales mix, staffing, margin, customer appointments as well as customer reviews and allow managers to track these metrics versus budget and historical trends and versus their peers. These dashboards also enable field managers to track teammates' progress with respect to training and certification goals and requirements.

Overall, these dashboards reduce the time spent by managers identifying the underlying cause performance issues, freeing up more time for coaching that will enable real improvement.

To drive visibility and accountability in the field, we are implementing a standardized store review process that our field managers will use when they visit stores. This cloud-based store report will set expectations for teammates by incorporating the same KPIs accessible in the dashboard. It will also include quantitative metrics such as rating for store appearance and in-store execution assessment to measure the customer experience.

In all, both the dashboard and the store report will provide field managers with the analytics to help them effectively manage their store base as well as the ability to measure the progress of our Monro Forward program. We expect both of these tools will be rolled out to the field by the end of this quarter.

To help us effectively design and implement the Monro Forward program, we've hired a third party, a firm which I've had great success with in the past. From a timing perspective, we expect our updated tire merchandising strategy will be implemented by the middle of fiscal 2019. With respect to our store refresh, in-store procedures and employee sales trading, we've already begun the first phase, the design and planning process, which we expect will also be completed by the middle of fiscal 2019. At which point, we will begin a pilot across 3 select markets. We expect the rollout to our over 1,100 company stores will be a multi-year initiative, to ensure there is minimal disruption to the business. Once rolled out, our stores will have a consistent look and feel regardless of market or store format, both inside and out. And importantly, from an execution standpoint, our teammates will have the tools and training to deliver a customer experience that surpasses our customers' expectations.

Turning to our second area of strategic focus, our marketing strategy. Today, the majority of our marketing is product focused, being primarily offer based and centered around oil change promotions. We will be moving to a marketing program that is customer focused and leverages the robust data we have in our CRM database to deliver the right message with the appropriate product and service offer to our customers at the right time. More specifically, we will leverage what we know about our customers' vehicles, their buying habits and OEM's maintenance tables to tailor a timely message regarding upcoming needed service or parts replacement. By engaging with our customers in a smart and appropriate way, we can improve customer retention, drive higher marketing productivity while putting forward the marketing message that encapsulates the true breadth of our service offering and reinforces our strong value proposition.

Turning to our customer acquisition efforts. We've hired a customer analytics firm to provide market segmentation and demographic information with a geographic area surrounding each of our stores so that we can identify potential Monro customers and directly market to them. By leveraging these customer analytics, we can also identify which of our stores are underperformers relative to the size of their potential target market and better focus our attention to driving improvement. Additionally, we can also use this customer information to help us in choosing greenfield locations as well as identifying favorable markets in which to pursue acquisitions.

Finally, we're also committed to ensuring that the Monro brand is well represented online. That means search engine optimization and local listing management to ensure our customers can find us. It also means creating a presence on social media and effectively managing our online reputation. Through our new dashboards, we are able to zero in on our stores with the lowest online customer ratings and address performance issues for our Monro Forward program. We also ensure that the stores which are providing exceptional customer service are accurately reflecting that in customer reviews online. From a timing standpoint, we expect to complete the work to our marketing strategy by the middle of fiscal 2019. We've got a lot of ground to cover, but we're off to a great start.

Our third area of strategic focus is on our teammates. Monro's long-term success will ultimately be based on our ability to effectively attract, train and retain talented technicians. Therefore, it is imperative that we have the internal resources to offer our teammates the technical training needed to effectively serve our customers as well as a clear path for career advancement. As I mentioned earlier, as part of the Monro Forward program, we are developing a comprehensive learning management system, an onboarding program we have named Monro University. With the increasing adoption of technology in newer vehicles, we want to ensure that our over 7,000 field teammates receive consistent and ongoing high-quality training that will support them through their career progression and allow Monro to capitalize on the continued market shift from DIY to do-it-for-me as vehicles increasingly become more complex.

As we enter the new fiscal year, we will revise our store compensation model to a more balanced scorecard, one that is driven by performance on sales, profitability and customer satisfaction. Our stronger field team model will also help to optimize our store staffing. As we previously discussed, our store scheduling process is currently done by hand. Our assessment has highlighted a large number of understaffed stores and a significant number of stores, which appear to be overstaffed. To bring better alignment to our store labor, we are once again investing in technology and expect to begin rolling out an electronic store staffing model in the fourth quarter of fiscal 2019, which leverages detailed sales data to more effectively staffed stores not only with the right number of technicians, but also match the appropriate complement of technical abilities based on the mix of services historically provided in each store. The adoption of this technology will allow us to better track and manage employee productivity and ultimately provide greater bandwidth in our store labor to drive sales while improving our customer experience.

With respect to our 4 strategic focus area and looking beyond our store footprint, we are making progress in delivering a true omni channel experience to our customers. In fiscal 2019, we will upgrade our website to a mobile capable architecture as well as add new content and make improvements to our user experience. We will also be building the capabilities for seamless omni channel experience, one that allows customers to view and purchase available tires online and to seamlessly make an appointment for installation at a nearby Monro location. Once completed, we believe these omni channel capabilities will significantly enhance our customer experience, drive traffic to our stores and favorably reflect on our brand. Our revamped website will also have the capability to seamlessly integrate with multiple third-party online tire sellers. As we discussed on our last earnings call, we are engaged with a number of online tire sellers as a preferred installer. While still representing a small percentage of our business, these installations are very profitable with a high average ticket that is comparable to our corporate average. And just as important, half of the customers sent to us from these online sellers are new to Monro, making this a meaningful traffic driver.

Also worth noting, as part of our assessment, we discovered that Monro is one of the only tire sellers online to include installation in the pricing of its tires. Unless consumers closely read the small print, this may give the appearance that our tires are anywhere from $17 to $20 higher than many of our online competitors. The reality is our pricing is in line with those of our largest competitors in our major markets. To alleviate this potential misperception, we will be unbundling the price of our tires and installation. We expect this change to be completed by the end of the fourth quarter. As with our focus areas, we will be using analytics to drive our pricing strategy going forward.

Turning to our fifth and last focus area, acquisitions. I believe the successful completion of the initiatives related to the other 4 strategic areas I just discussed will drive a stronger, more scalable business model, capable of more efficient acquisition integration with higher returns on investment. With the passing of corporate tax reform, we do expect to see some pickup in acquisition opportunities as we look out to fiscal 2019. We have a disciplined approach to acquisitions, which we will continue to follow and build upon. Additionally, the investments we are currently making will only help us to integrate these future acquisitions that much faster. As you may have seen in this morning's press release, we signed a definitive agreement to acquire 7 stores, which nicely fill in our existing footprint, with annualized sales of approximately $7 million. As we look ahead, we remain excited by our M&A prospects with a strong acquisition pipeline and more than 10 NDAs on opportunities ranging from 5 to 40 stores.

To conclude, as I reflect back on my 6 months at Monro, I'm pleased with the steps we've taken, and I'm confident in our detailed assessment of the business, the opportunities as uncovered and the plan we put in place to drive change throughout the organization. We do not expect to see improvement overnight as these initiatives will take time to implement. But I'm confident that our investment in technology, our data-driven approach, coupled with strong and disciplined execution, will deliver long-term profitability and value to our shareholders.

On our fourth quarter earnings call in May, we will be laying out a 3-year plan reflective of our business transformation, which will include a series of benchmarks to track our progress. As we discussed in our last earnings call, we believe many of our initiatives could be executed by reprioritizing our capital investments and thus, would not significantly change our company's investment profile. Having said that, with the significant benefit we are projecting from lower corporate tax rate in fiscal 2019, we are considering taking a portion of these tax savings and accelerating our investments in fiscal 2019 to fast track many of our initiatives. We are still working through our fiscal 2019 budget, and we'll provide an update on our capital expenditure plans and financial targets on our next earnings call.

With that, I would now like to turn the call over to our Chief Financial Officer, Brian D'Ambrosia, to provide a detailed overview of our third quarter results.

Thank you, Brett, and good morning, everyone. Sales for the quarter totaled $285.7 million, representing a 0.9% or $2.6 million decrease year-over-year. New stores, defined as stores opened or acquired after March 26, 2016, added $6.4 million, including sales of $2.3 million from our fiscal 2017 and 2018 acquisitions. This was offset by a comparable store sales decrease of 3.1%, and a decrease in sales from closed stores of approximately $1.4 million. The third quarter had 90 selling days, in line with the prior year period.

As of December 23, 2017, the company had 1,138 company operated stores and 103 franchise locations as compared with 1,098 company-operated stores and 132 franchise locations as of December 24, 2016. During the quarter, we added 4 company operated stores and closed 2.

Gross profit for the third quarter was $107 million or 37.4% of sales as compared with $105.6 million or 36.6% of sales for the prior year period. The increase in gross margin for the quarter was due primary to a decrease in material cost as a percentage of sales, largely due to sales mix.

Labor costs were flat as a percentage of sales as compared to the prior year quarter. Distribution and occupancy costs for the quarter increased as a percentage of sales as we lost leverage on these largely fixed costs with a decrease in comparable store sales.

Operating expenses for the quarter increased $5.2 million and were $77.7 million or 27.2% of sales as compared with $72.5 million or 25.2% of sales for the prior year period. The increase is primarily attributable to $2.7 million in one-time cost consisting of $2 million in litigation settlement cost and $0.7 million in management transition cost. The remaining year-over-year dollar increase represents expenses from 40 net new stores.

With respect to a litigation settlement I just mentioned, in December 2017, the company did settle a litigation matter that had been pending for several years related to alleged violations of the Fair Labor Standards Act and certain state laws relating to overtime and unpaid wages. The case had recently entered court ordered mediation following a series of court decisions in the company's favor. The settlement occurred at the nonbinding mediation before which, the company had a low expectation of settlement. However, during the mediation, the company took the opportunity to settle the case as well as any related potential litigation in an amount slightly less than $2 million, which we estimated to be less than the legal fees and expenses that would likely incur in connection with defending this matter over the next 12 months. Therefore, our analysis led us to the conclusion that the settlement was, at that amount, a favorable one. Any litigation takes a certain amount of management's time and attention, and we believe that settling this matter will allow management to focus on running the company's operations and executing the initiatives previously laid out.

Turning to our operating income for the third quarter of $29.3 million, which increased by 11.4% as compared to operating income of $33.1 million for the same quarter last year, and decreased as a percentage of sales from 11.5% to 10.3%. Excluding the one-time cost in the quarter, operating income would have been $32 million, a decrease of 3.4% year-over-year, and operating margin would have been 11.2%, a decline of 30 basis points year-over-year.

Net interest expense for the third quarter increased $0.9 million as compared to the same period last year. The weighted average debt outstanding for the third quarter of fiscal 2018 decreased by approximately $14 million as compared to the third quarter of last year. This decrease in debt is due to the pay down of our bank debt using cash flow from operations, partially offset by higher capital lease debt recorded in connection with our fiscal 2017 and 2018 acquisitions and greenfield expansion. The weighted average interest rate for the quarter increased by approximately 110 basis points year-over-year, mainly due to the high interest expense associated with capital lease and financing obligations, coupled with higher LIBOR and prime interest rates as compared to the prior year period.

The effective tax rate was 50.1% for the third quarter compared to 37.2% for the same period last year. On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act in to legislation. The new U.S. tax legislation is subject to a number of provisions, including a reduction of the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018. Under accounting guidance, the tax effects of the new legislation are recognized upon enactment. Accordingly, our net deferred tax assets and liabilities have been revalued at the newly enacted U.S. federal corporate income tax rate and a tax expense of $5.3 million was recognized in our tax provision as a discrete item during the quarter ended December 2017.

Further, we recognize an income tax benefit of $2.1 million related to the reduction of approximately 300 basis points in our estimated annual effective tax rate during the quarter ended December 2017. For the quarter, the net tax expense related to the new tax legislation of $3.2 million decreased diluted earnings per share by approximately $0.10. We expect future earnings to be positively impacted by the new tax legislation, largely due to the reduction of the U.S. federal corporate income tax rate. This should represent a reduction in our estimated annual effective tax rate from approximately 37% to 24%, and a benefit of between $0.45 and $0.50 of diluted earnings per share in fiscal 2019.

Net income for the current quarter of $11.6 million decreased 34% year-over-year. Earnings per share on a diluted basis for the third quarter were $0.35 as compared to last year's $0.53. Excluding $0.10 per share related to the net impact of newly enacted tax legislation, $0.04 per share in litigation settlement cost and $0.01 per share in management transition cost, and adjusting for rounding. Adjusted diluted earnings per share for the quarter -- third quarter of fiscal 2018 were $0.49 per share, a decrease of 7.5% year-over-year.

Now I would [like to] briefly comment on our balance sheet, which continues to be strong. Our current ratio at 1.1:1 is comparable to year-end fiscal 2017. Inventory turns at the third quarter of fiscal 2018 improved as compared to fiscal 2017 year-end and the third quarter of fiscal 2017. During the first 9 months of fiscal 2018, we generated approximately $97 million of cash flow from operating activities and reduced our debt under our revolver by approximately $28 million. Capital lease and financing obligations increased $16 million, due primarily to the accounting for our fiscal 2017 and 2018 acquisitions and greenfield expansion.

At the end of the third quarter, debt consisted of $155 million of outstanding revolver debt and $245 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 to 39% at December 2017 from 41% at March 2017. Excluding capital and financing leases, our debt-to-capital ratio was 20% at December 2017 and 24% at March 2017.

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 have approximately $420 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 covenant 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 the first 9 months of this year, depreciation and amortization totaled approximately $36.5 million. We received $3 million from the exercise of stock options, and we paid about $18 million in dividends. We spent approximately $29.7 million on CapEx and $16.4 million on acquisitions, including 1 to 4 store acquisitions completed as part of our greenfield expansion strategy. As you saw in this morning's press release, we announced that we signed a definitive agreement to acquire 7 stores. These stores fill in existing markets and are expected to add approximately $7 million in annualized sales, representing a sales mix of 45% service and 55% tires. This acquisition is expected to close in the fourth quarter. Acquisitions completed and announced to date in fiscal 2018 are expected to add approximately $20 million in annualized sales and be breakeven to diluted earnings per share in fiscal 2018.

During the quarter, we opened 4 greenfield locations, bringing our total greenfield store openings to 14 fiscal year-to-date. We expect to open another 13 locations in the fourth quarter with 27 greenfield store openings expected for fiscal 2018. As a reminder, greenfield stores 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.

Now turning to our outlook for fiscal 2018. We have narrowed our fiscal 2018 comparable store sales range of negative -- to a range of negative 0.5% to an increase of 0.5% on a 52-week basis, or an increase of 1.5% to 2.5% when accounting for the 2% comp sales benefit from an extra week in the fourth quarter. This compares to our previous guidance, which called for a decrease of 1% to an increase of 1% on a 52-week basis. Based on the updated comparable store sales guidance and the contribution from today's announced acquisition, we now anticipate fiscal 2018 total sales of $1,120,000,000 to $1,135,000,000, representing an increase of 10% to 11% year-over-year. Our guidance does not assume any future acquisitions or greenfield store openings.

The updated guidance implies a 3% comparable store sales range for the fourth quarter of fiscal 2018 at the midpoint of the 52-week range. This compares to a decline in comparable store sales of 8% in the fourth quarter of fiscal 2017.

Turning to our cost outlook. Our fiscal 2018 guidance continues to assume a slight moderation in our overall tire cost in the fourth quarter as compared to the third quarter as well as lower oil cost year-over-year. Given these assumptions, we continue to expect to generate operating leverage and a comparable store sales increase above 1% on a 52-week basis. As a reminder, every 1% increase in comparable store sales above this threshold generates an incremental $0.08 in EPS for the fiscal year, excluding the extra week. Our fiscal 2018 guidance now anticipates diluted earnings per share to be in the range of $1.88 to $1.93 to reflect the revised comparable store sales guidance as well as $0.04 in third quarter litigation settlement cost, $0.10 in third quarter incremental net tax expense and an expected $0.02 in net tax benefit in the fourth quarter from the newly enacted tax legislation. This compares to our previous guidance of $1.95 to $2.10.

The earnings guidance continues to include $0.05 management transition cost and $0.10 per share in contribution from the extra week in the fourth quarter, and now includes $0.16 to $0.18 in accretion for the recently completed acquisition versus previous guidance of $0.15 to $0.19.

Excluding the impact of the litigation settlement, the midpoint of our earnings guidance represents flat operating margin for the fiscal year with operating margins expected to improve year-over-year in the fourth quarter due to improved results from recent acquisitions, continued sales execution and the impact of the extra week in fiscal 2018.

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

(Operator Instructions) And we will first go to Brian Nagel from Oppenheimer.

So my question, just on sales, maybe a little more quantitatively. But you laid out in your prepared comments the cadence of, I guess, monthly comps and into the fiscal fourth quarter here. How do you -- how is the overall sales environment shaping up? I mean, it seems like the weather has gotten more favorable for you. Is that reflective in the numbers? Do you think you're capitalizing upon that weather? Are there other factors at play here, so to speak, driving these better comps?

A couple of points to comment on there, Brian. If you go back to our Q2 call that we had, we knew going into the second half of the year that we were going to experience some volatile comps between our Q3 and Q4, largely driven by December and January dynamics we saw last year, driven by pretty favorable winter conditions in December of last year. So given that fact, we elected to guide flat sales on the year. And our internal estimates were down 3 and plus 3 for Q4. So based upon that, we certainly feel good that we came in line with what we were expecting, albeit, I think, we all would agree, we have opportunities to improve off of that. But given the strong comps last year, we felt like that was a reasonable place to be, and we're encouraged that we came in according to that. Related to the dynamics in January, I would say this. On a 2-year stat basis, you look at December of this year, we were up plus 10 in January, down plus 10. So if you net that out, rolling across the calendar year, we're basically flat. As I mentioned, we have seen some nice acceleration in February, in particular, with sales up 4%. Certainty, it's very early in the month. As we look through the latter half of February, we will be lapping some lighter comps. So we're somewhat encouraged by that yet we recognize there's still a lot of time left in the quarter. And our March comp is certainty one of the harder comps for the quarter we have to overcome. So the net of that is guidance of 3 up on the quarter. A couple of other things that we're seeing. Certainly, the weather conditions have provided some favorability namely on tires, and we're also encouraged that some of the colder temperatures we would expect to set a nice backdrop to our spring service selling season as well. Would like to comment just about -- a little bit of a cultural change that we've started to see in our team and our organization. Certainly, not going to suggest that's driving our improvement performance, but I think it's playing, certainty, a factor. Like the team has responded extremely well to our Monro Forward initiative, I think they're excited about the new tools that we're going to be rolling out the latter part of the month of February, and we're excited about the forward direction that we have as it relates to all of these initiatives.

That's very helpful. And then just one quick follow-up with regards acquisitions. In prior conversations, we've talked a lot about prospects or the hopes of tax legislation change, keeping some of your potential bigger sellers on the sidelines. But now that we have a tax legislation in place, have you started to see those sellers of larger chains come back in force you?

Yes. The opportunity is that we're now seeing coming into our pipeline certainly have accelerated after the first of the year. And as a result of that, we've expanded our M&A team to manage this increase in activity, Brian. We are certainly in the game for acquisitions. But just to remind everybody, we're in the game with a keen focus on delivering value to our shareholders. We believe that value to our shareholders will come through a combination of the right acquisitions, some greenfield developmental where it makes good sense for us. And then, of course, we'll just reinforce the fact we're very focused on the execution of our operational excellence initiatives that we've just discussed in this call. But [net now], we definitely see some improvement in the deal flow, if you will, in our M&A pipeline.

And our next question comes from James Albertine from Consumer Edge.

Let me just say thank you for all the detail you provided on the prepared remarks on the call and certainly looking forward to the 3-year plan later this year. Wanted to ask, if I may, a question that we and others have asked for many years to no avail. Really hasn't been a great data, a great answer around it. I'm hopeful we can get a little bit more granular today, given all of the data that you've laid out and all the work you're during around data and analytics. But really, it's a question of market share and as well, sort of the idiosyncrasies of operating in the northeast versus other parts of your portfolio. Clearly, the south is outperforming the northeast. You said that in prepared remarks. Do you have a better sense or a better handle of where your market share is today relative to peers? And maybe help us sort of draw a line in the sand as to where you stand, either absolute percentage or in terms of the share you believe maybe Monro has yielded over the past several years? Because it does sound like you've been giving up share based on some of the initiatives that you've outlined.

Maybe to start with, I'll give you a little bit of color more on our performance for the quarter. We highlighted that our south outperformed the rest of our portfolio, but we also saw relative outperformance in our mid-Atlantic region. We saw some nice strength in our northeast stores, relatively speaking. Our softest performing markets would be in the Great Lakes region that we saw in the quarter. As it relates to market shares, in our industry, it's pretty difficult to get our arms around that with the finite data. However, as I made some comments in my prepared remarks around a company that we partnered with on analytics, that's going to allow us -- or the intention behind that partnership is twofold. One, we want to make better real estate decisions and analytics associated with that, but also want to leverage that data to drive more targeted acquisition efforts from a marketing point of view. By virtue of having that data, we will then have a much better view in terms of what our share of market is. But currently, where it stands today, I certainly don't have a lot of this there. We certainly look at other metrics that are out there, performance in the tire category relative to what we see in the form of tire shipments into the trade as well as comments from analyst like yourself and others. But as I made the comment when I first joined the company, I think there's been 3 drivers that have impacted the performance on our business over the last few years. One, certainty has been the more macro trends that we have faced as related to our cohort, 6- to 11-year vehicles that over the last 5 to 6 years, we've experienced 15 million fewer vehicles in that cohort. So no doubt, that's played a factor and a headwind on our organic growth. Certainly, weather, up until recently, has played a factor. But I've also been quickly, I think, in a position to point out that we believe we have opportunities to improve our performance. And if I look at all the initiatives that we are laying out and our committed to executing, those are all geared towards improving not only how our stores look but equally important, how we operate in stores. And we believe if we do that well, we will protect the share of market in the markets that we have, and that will translate into more consistent, sustainable, organic growth over the company than what we've seen in the past.

I really appreciate that color, Brett. And as a follow-up, if I may. With respect to the comment on the analytics partner, better real estate decisions, driving more targeted acquisition efforts, are we to take from that an implication that you're going to look to add new markets at a faster rate perhaps than Monro was doing historically? And then to follow up, the demographics and the vehicles in operation data that you have, is there anything kind of funny in that data that just sort of shows the northeast is a little bit in a worse position perhaps relative to the south and mid-Atlantic that can help support that?

I'll start with the second part. I think when you look at our company, given the fact that we have just under 50% of our business mix is related to tires, certainty, in the northeast, given an outsized exposure to weather dynamics that we used to see in that portion of our footprint, it creates more exposure to volatility and ties us more closely to weather dynamics that will steer demand, stronger or weaker, dependent upon those conditions. So I think I would say that's the larger backdrop in terms of what we see as related to the northeast. So as it relates to analytics, again, I think we're going to use that data to help drive better decisions across a multiple vectors. One, again, making better decisions around our leases. Number two, will help us optimize our DMAs or MSAs, which will drive our targeted acquisition efforts as well as greenfields in terms of filling in. But certainly, we'll use it to help look to potentially accelerate growth in more attractive geographic segments in our business as well. And a fourth piece that we'll use that data to help drive in our company is really understanding better what is the potential of our stores, we'll be able to drive forecast based upon market demographic and trends, and we'll use that as a tool to help better set more appropriate forecasts and budgets for our stores.

And we'll now move to Bret Jordan from Jefferies.

This is Mark Jordan on for Bret. Just going back to your regional performance during the quarter, did the regional gap close or widen maybe from October to December? And do you have any reason in the current quarter, I think there was some favorable weather in the northeast that might have fallen into fiscal January?

Yes. So certainty, the gap did widen in the quarter, particularly highlighted by December. And then secondly, as we move into January, here, we are seeing that reverse in January and narrowing with better performance in the northeast relative to the south.

Great. And then Q4 (inaudible) strength, kind of outside of maybe higher traffic, is there any product mix that might be driving the comp improvement?

Yes. Still very early in the quarter for us but certainly, the traffic trends related to tires, we've seen some strength in our tire categories will go through January into February.

Great. And then just following up on the M&A question that was asked earlier. Have you seen any difference in acquisition multiples or expect any given tax reform going forward?

I think my commentary is pretty consistent with what we said last quarter related to M&A and valuation. So I think certainly, on the larger deals, we've seen an increase in the multiples that those are trading at. We have yet to see that materially impact the multiples that the 5 to 40 store operators would expect. So no material change at this point that we've seen driven, in particular, by the tax law change.

And we'll now go to Matt Fassler from Goldman Sachs.

My first question focuses on the different scenarios for investment that you see going forward and particularly, the range of costs that might get associated within. I know you're going to share a more detailed accounting of what that might look like on the May conference call. But is it a question of speed? Is it the question of some of the IT and other infrastructure that you need to accumulate just to understand the range of outcomes as we try to frame the margin path for the business?

That's great -- it's a great question, Matt. The short answer is, yes, it does range and vary based upon speed in our ability to execute and we want to be thoughtful about how quickly we drive change in our organization. So certainly, that's going to be a gating item that we'll work in our way through, that will reflect in our FY '19 and beyond plans. Just to reinforce maybe a couple of other insights or perspective around our investments going forward. There are 3 broad themes that we are sending to our team internally. Number one, we want to invest in our stores. Number two, invest in our people in terms of training, capability, career path and development. And then three, there's a large theme you've been hearing a lot about, which is investing in technology. I will say this, if you look at the 3 investment themes, no doubt the most capital intensive one is around our stores in terms of how we look and how we operate, which is driving most of our work right now to really start to break down our portfolio, to understand the state of the stores within the portfolio, which will drive the amount of investment that we think we need to do to bring them up to our standard. And that, of course, will drive our timeline that we'd expect to roll that out under. As it relates to the other initiatives around technology and training, really, the gating item there is internal resources. As we found out already with a number of technology investments we've already made in the company, it's allowed us to eliminate costs that we have spent in other programs or platforms, keeping our net investment in the company net neutral on several of the technology investments we've made to this point.

Understood. And then because CapEx dollars are ultimately fungible, is it feasible that perhaps you could cut back on greenfield stores, for example, in fiscal '19, and put some of that cash into technology CapEx? Is that one consideration as we think about outcomes?

Yes, absolutely, Matt. If you look at our total CapEx spend on average, it's around $35 million, of which, $25 million to $30 million is maintenance CapEx. So certainty, as part of our forward view here, we will be looking at the total investment and prioritizing the total dollars to really ascertain how much needs to be incremental versus reprioritizing our current spend.

Yes. I think the other important thing about the CapEx spend as well is just that if you listen to Brett's prepared remarks regarding the timing, certainly related to the light refresh that's going to be designed and planned throughout the first half of fiscal '19, and then a pilot across a few markets after that, and then the rollout. So certainty, as we think about 2019, fiscal '19, we don't have a full 12 months of this initiative being spent on the light refresh. So I think that will mitigate some of their reinvestment or the investment in FY '19.

Understand. And then, Brian, this second question is for you. So I hear you on the 24% tax rate on an annualized basis. Given that the quarter ended in December, can you just explain the line item for the kind of tax benefit that you would have registered? You classified it as a onetime item. And I'm trying to understand whether that relates to marking a part of the quarter, part of the year to the new tax regime. And then also, I think you talked about only $0.02 for the fourth quarter in terms of lower tax rate. So what are the tax assumptions that feed those items? I understand that write down to the DTA, that's pretty intuitive. But the other piece is just as we finish out this fiscal year, and we decide what's truly onetime in nature like a detailed write down versus what's the beginning of the adoption of the more normalized element of the new tax bill.

Sure, sure. So for a noncalendar year, a taxpayer like ourselves, March fiscal, the way you calculate the annual effective tax rate is basically to prorate it. So we basically recalculate our annual effective rate using 9 months at the old federal rate and 3 months of the new rate. So what that creates is in the third quarter, we were supposed to true-up to that new effective annual rate. So within that $0.06 of benefit is basically not only the benefit recorded in Q3, but the cumulative benefit of recasting Q1 and Q2 to the new effective rate. So that's why the $0.06 is not a run rate that you can expect us for a quarter, that is basically the full 9 months of catch up. And that's also why the fourth quarter is only $0.02, that's also due to the rate reduction, but that also reflects that annual prorated rate. And for that reason, as we move into 2019, we'll -- without the proration in effect anymore, we'll get the full benefit of the 21% federal rate.

So another, that $0.06 plus $0.02 is effectively the full 4 -- I should say, yes, fourth quarter benefit, which is the only quarter that falls into fiscal -- falls into the current fiscal -- current calendar year. Is that fair?

The $0.08 would be the -- basically, the annual benefit of the rate related to the fourth quarter being 21%, blended back across our full fiscal year.

(Operator Instructions) We'll now go to Rick Nelson from Stephens.

This is Nick Zangler for Rick. Just to touch again on the upcoming investments, the ones that you went through on the strategic initiative standpoint. There's a lot going on there. How should we think about, from an OpEx standpoint of view, particularly as we enter fiscal '19, are we seeing bottom line or redeployment of spend? Or are we to expect incremental spend as we go forward?

Yes, I think that what Brett explained earlier is that some of the initiatives we've already identified currently is really a redeployment of spend where we maybe taking some solutions that were already in place and optimizing them for some current technologies and current technology investment. So I think that there's a good portion of our OpEx spend that will not be necessarily incremental but self-funded. And then as you move towards the CapEx, we've obviously already commented on that and certainly, any redeployment of CapEx would already be contemplated but any incremental CapEx is going to have a depreciation impact, and we'll provide some more color on that in May.

Maybe to add a little bit more color to that as well. A lot of the investments that we're talking about here over the next 6 to 9 months are primarily technology investments. And we've elected to pick off-the-shelf partners and the affordability on the solutions we selected is quite affordable. So as Brian mentioned, just to reinforce the point, in many respects, we'll eliminate the cost that we've incurred in the company to fund the initiatives that we've laid out here. So we don't see a lot of incremental spend on the OpEx side going forward.

Great. And then just to get back on the acquisition. I know you touched on it briefly here, but I'm just trying to gauge, given the savings that you're going to get from tax reform, are you guys more willing to bid up to get an acquisition price to get these deals done? Does the additional capital available change your valuation criteria at all?

I think, as I mentioned in my prepared comments, growth through acquisitions is going to be a key component of our growth story of the company. And certainly, I think with the uncertainty that we saw with the tax law that's created a little bit of a pause second half of last year. And I think as a company, we took advantage of that to manage the transitional leadership in the company and develop our forward strategy. And by the way, the forward strategy, I think, helps me get more confident that we can drive more integration and more value from the companies we acquire and allow us to have more confidence that we can accelerate in the pace in which we integrate them into the company. So having said that, I think certainty, Monro is going to be in the ballgame for acquisitions. And our appetite for deals is there. We certainty have balance sheet capacity to do that and provided the opportunity that we're looking at creates value for the company and our shareholders. We certainly are going to be in a position to take advantage of that.

And we'll now go to Carolina Jolly from Gabelli.

Just quickly on tires, I guess, can you talk about price versus volume and any factors that are affecting those 2 variables and potentially, I guess, what might affect that going forward?

Yes. I think the broader backdrop that we provided in our comments that we have seen a pretty stable environment on retail pricing throughout Q3 and continued into Q4. As we talked about in the quarter, we did see some favorability in our price mix on tires and part of our margin expansion in the quarter was driven by some favorability on the cost side. But as we highlighted in Q2, we expected a flow through to our P&L in the second half of the year. So recharacterizing environment is pretty stable environment right now on both pricing and cost.

Okay. And then just second, quickly regarding weather. When you have this type of favorable weather that we've seen in end of December, early January, do you have any thoughts on when that kind of can be seen through same-store sales over the next fourth quarter?

I think normally speaking, tires, the tire side of our business, you would see usually somewhat of a real time pick up in traffic and volume just given that consumer behaviors relates to tires. And as it relates to more service related items on a consumer's car, the cold weather has a tendency to create mechanical issues and break things on consumers' cars. And in many cases, consumers will get around to doing that in the spring period. As I made the comment in my opening remarks, certainly, the colder temperatures that we've seen, certainly, sets up what we would see as somewhat of a favorable spring service season as a result of the colder temperatures that we have seen.

And there are no further questions. I'll turn the conference back over to you, Brett, for any additional or closing remarks.

Thank you. Before we conclude the call, I want to reiterate how excited I am about the tremendous opportunity to drive improvement across our organization. I would like to thank all our teammates for their continued hard work and dedication to our customers. I am confident that the strong foundation of our business, coupled with our renewed focus on the customer and data-driven approach, will create sustainable, long-term value for our shareholders. Thank you all for joining us today and for your continued support as we enter a new phase in Monro's history. Have a great day.

This concludes today's presentation. Thank you for your participation.