Monro, Inc. (MNRO) Q4 2012 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Welcome to the Monro Muffler Brake Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference 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. Jennifer Milan 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 in 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’s 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. Joining us for this morning’s call from management are Rob Gross, Chairman and Chief Executive Officer; John Van Heel, President; and Chief[ph] D’Amico, Chief Financial Officer. With these formalities out of the way, I’d like to turn the call over to Rob Gross. Rob, you may begin.

Thanks Jen. Good morning and thank you for joining us on today’s call. We are pleased that you are with us to discuss our fourth quarter and fiscal 2012 performance. After reviewing our quarterly and full year performance, I’ll provide you with an update on our business as well as our outlook for the first quarter and new fiscal year. I’ll then turn the call over to Cathy D’Amico, our Chief Financial Officer who will provide additional details on our financial results. Before we get into the details of the call, I want to spend a minute on our recent sales results in April and May. Fiscal 2012 was a tough enough year, but we were able to increase core EPS by a solid 15% excluding the 53rd week and comp store sales growth of less than 1% adjusted for days. While we aren’t happy with those results, we didn’t expect the sales trends that we have seen thus far in April and May, which has been the worst 7-week sales period since I have been with the company. However, I don’t think we got dumber overnight or in this case the last 7 weeks. And the favorable industry trends and our business model advantages haven’t changed. Actual results that we have from tire manufacturers and tire and service competitors, including the guys we are negotiating with to buy tell us that for the most part our recent performance is in line with if not better than industry trends. While weather was a negative factor for us in Q3 and Q4, it can be nothing, but as a positive for us this Q3 and Q4. We believe that overall pressure on the consumer is the overriding driver of our poor start to fiscal year 2013. We are continuing to execute on the initiatives that delivered 11 straight years of positive comp sales and 20% average EPS growth. We have accelerated acquisitions in this difficult market as we said we would in times of slow organic growth. Our strategy which we believe is the right one has not changed and we will continue to execute on it. We are not happy with the start to fiscal 2013, which is the main reason for our weaker than usual projected EPS growth for the full year. But at the end of the day, people need what we sell and can only defer purchases of our products and services for so long. Nothing has changed regarding the long-term industry trends. I believe that sales will improve as we move through fiscal 2013 and customers turn to us for these deferred purchases. The growth we achieved this year both organically and through accelerated acquisitions will benefit the company and shareholders beyond this year. Now, turning to our performance, we performed solidly overall for fiscal 2012 setting new records for both our fourth quarter and full year results despite the lingering tough environment and a softer finish to the year than we had anticipated. We believe these results demonstrate the flexibility of our business model, which allows us to advance our business in both strong and weak markets. Low cost company owned operations in markets with strong store density allowed us to continue to effectively service our customers’ needs while owning both tire and service store chains provide pivotal flexibility as service stores fare better in a tough year for tire sales across the industry. I would like to thank each of our employees who continue to work hard to provide consistently superior service to our oil customers. Our brand strength is a direct result of this consistent execution, which is an integral part of Monro’s compelling customer value proposition. Let me begin by providing a review of our fourth quarter and fiscal year results. For the quarter, our comparable store sales adjusted for days grew 0.7% versus flat comparable store sales last year. Sales during the quarter were weaker than we had anticipated which we believe is a function of the tough economic environment and the mild weather. On a reported basis, comparable store sales increased 7.4%. In total, we increased sales by 13.9% to a record $171.7 million compared with $150.8 million in sales in the prior year fourth quarter with total sales reflecting contribution from our fiscal 2012 acquisitions and the extra week. For the fiscal year, our comparable store sales were up slightly versus last year adjusted for days, our 11th consecutive year of positive comparable store sales. On a reported basis, comparable store sales increased 2%. Total sales for the fiscal year increased by 7.8% to a record $686.6 million compared with $636.7 million in the prior year. Notably, our fiscal 2012 acquisitions continue to perform very well and contributed to our top and bottom-line performance as we expected. Over the last several quarters, we have discussed actions that we are taking to combat the gross margin pressure we are experiencing as a result of both the expected product mix shift towards sales of lower-margin tires, which is associated with our recent tire store acquisitions and significant cost increases on tires and oil. Although, we continue to leverage the increased purchasing power that has resulted from our recent tire store acquisitions and shifting purchases between our broad base of vendors, we made this decision during the third and fourth quarters not to pass certain price increases along to consumers following higher than normal retail price increases earlier in the year, that were not implemented by many of our industry competitors. Although, we did raise tire prices in January and March, our gross margin remained under pressure decreasing 140 basis points during the fourth quarter to 38.7% versus 40.1% in the prior year. For the full year, gross margins declined a modest 10 basis points. As we have said in the past, we are focused on leveraging our business model to create sustainable long-term value by capitalizing on our size and the strength of our company operated store model. In this regard, we have been working to increase our direct international sourcing primarily from China. Our goal has been to achieve a run rate of approximately 30% of our total product cost less oil and out buys by the end of fiscal 2012. And we achieved that level. We continue to see an opportunity to help offset future gross margin pressure and hopefully deliver incremental benefit by further increasing our direct international sourcing. Over the next 12 to 18 months, we believe we have an opportunity to take that run rate to 40%, which will help us at least partially offset the continued cost pressure particularly on tires. At the same time, we are careful in managing our costs and our recent acquisitions will continue to benefit operating margin. For the fourth quarter, operating income increased 21.2% to $17.5 million, which translates an operating margin of 10.2% compared with 9.5% in the fourth quarter of last year. The extra sales day in the fourth quarter helped drive this improvement. For the full year, operating income increased 16.6% to $91.4 million from $78.4 million in fiscal 2011, which translates into an operating margin of 13.3% versus 12.3% in fiscal 2011. Net income for the fourth quarter increased 27.3% to a record $10.5 million from $8.2 million last year. Our earnings per share rose 26.9% to $0.33 on a base of 32.2 million shares outstanding from $0.26 in the prior year quarter. For the full year, net income increased 19.1% to a record $54.6 million from $45.8 million in fiscal 2011. Full year earnings per share increased 17.4% to $1.69 from $1.44 in 2011. As you know, we’ve factored the 53rd week into our guidance for the fourth quarter and full year fiscal 2012. Let's break it out for you. We estimate that the 53rd week provided a $0.07 benefit to the fourth quarter and full year earnings. It is important to note that operating income for the fourth quarter and full year of fiscal 2012 includes $1.3 million of pre-tax due diligence cost, which were much higher than our typical due diligence costs in a single quarter and related to Midas, which was sold to a higher bidder. The due diligence costs equates roughly $0.03 an earnings per share, which was not factored into our original guidance for the fourth quarter and full year. In terms of sales category trends during the quarter, comparable brake sales were again solid posting a 4% increase, consistent with the 5% increase last quarter. At the other end of the spectrum, exhaust comparable store sales were down 8% after being up 12% in the third quarter and up an average of 5% over the past 2 years go figure. Comp sales for tires increased 2% in the quarter all in more due to price increases following a 5% decline in the third quarter. At 39% of our sales mix, we have significantly higher mix of tires than our competitors with the exception of the independent tire retailers we are looking to acquire. Tires are big ticket item and with the recent tire price increases in this environment where gas, food and other prices are also higher there has been sticker shock. Being that tires are a safety issue and a need based on wear and mileage, we believe that the level of deferrals has increased significantly and that reversal of this trend should positively impact sales the second half of fiscal 2013. We continue to promote sales in key categories through specific programs such as Oil Change and More in which our customers receive free tire rotations and brake inspections with the purchase of an oil change, and Brakes Forever once we guarantee brake pads for the life of the car and we price pads for only the cost of labor. We believe that these initiatives continue to create value for our customers and build trust and are particularly important to return economic times like these. Turning now to our growth strategy, we continue to be focused on increasing our market shares to same store sales growth, opening additional new stores in existing markets and acquiring competitors the attract the valuations. We expect moderate, organic sales growth for fiscal 2013 as a result of continued pressure on consumers. However, we believe that we are well positioned to take advantage of additional acquisitions at attractive valuations. We have been accelerating these acquisitions so far in fiscal 2013 with compelling opportunities that sit right in our wheelhouse. Importantly, these acquisitions will further expand our market share and our operating leverage, positioning Monro for continued profitable growth. We will continue to pursue these transactions in a very disciplined manner. Regarding discipline, as you are aware, we were involved and had vigorously analyzed the potential of purchasing Midas. In the final analysis, we determined that the price was too high and the risk versus reward too great. Now turning to our more successful recent pursuits with the $9 million in annualized sales from the Terry’s Tire Town acquisition in October 2011, plus $36 million in annualized sales from the Vespia acquisition in June 2011, Monro added $45 million in annualized sales or 7% acquisition growth in fiscal 2012. We are very pleased with the results that we’ve seen thus far from these acquisitions as sales and earnings from these stores have been better than expected. Vespia was slightly accretive in fiscal 2012 and as Terry’s Tire Town stores are on track to be slightly accretive in the first 12 months of ownership ahead of plan. We remain focused on executing our longer term business plan which includes pursuing growth through acquisitions at an accelerated phase during periods of slow organic growth. 2013 has already started off as a strong year in this regard. As mentioned in our press release this morning we completed the acquisition of Kramer Tire on April 1, representing approximately $25 million in annualized sales, which is expected to be slightly accretive in fiscal 2013. This acquisition adds 20 locations to our existing 17 locations in the Norfolk, Virginia market giving us #1 market share in that region. We also expect to complete the acquisition of 18 retail stores from the Colony Tire business on June 2 representing an additional $25 million in annualized sales and expanding our presence in North Carolina. This represents a combined total of $50 million in incremental annualized sales so far in fiscal 2013 or 7% acquisition growth. Additionally, we have signed a letter of intent and one more similarly-sized transaction that we anticipate closing in the second quarter which would bring acquisition growth so far in fiscal 2013 up to double digits on a run rate basis. Overall, we continue to pursue value price accretive bolt-on acquisitions to further fill out our footprint and potentially expand into new markets as we position the company for longer term growth. We’re seeing more opportunities for attractive deals than we have in the past several years due to the increasing difficult operating environment, cost pressures, and growing seller concern over potential future income and capital tax gains increases. In fact, we presently have 7 NDA signed up from 6 last quarter after having completed one of those acquisitions and discontinuing discussions on another 2. We have plenty of liquidity and strong cash flow to complete these deals. We remain very disciplined on the prices we will pay and believe that this is extremely favorable acquisition environment that will continue through calendar 2013. I’d now like to briefly discuss our outlook on the environment and industry prospects. As I’ve discussed, higher year-over-year gas and food prices and high unemployment continue to negatively impact consumer sentiment and purchasing behavior, which affects Monro as a service and retail business, as well as the whole industry. These factors also negatively impact miles driven, although miles driven are now on older vehicles, which offsets this impact to some extent. However, as we have always said, the good news is that our services and products are a need, not a want purchase and we have been able to support higher sales prices through convenience advertising and store execution. Significantly, we’ve had 9 consecutive years of averaging approximately 17 million new cars sold through 2007, which have grown the number of vehicles in our sweet spot, which is 4 to 12 years to an all-time high. Plus in our view, the 14.5 million new car sales projected for calendar 2012 will not dent the growing age of the average vehicle in the U.S. fleet, now at a record 10.8 years, which is driving our business forward. In short, we believe the long-term trends for our business are still in place and remain very favorable notwithstanding occasional short-term choppiness. Let me now turn to our outlook for fiscal 2013. As we discussed, the first quarter of fiscal 2013 has started off lousy. April and May comps are down 7 versus up one last year. Over these 7 weeks, comp store oil changes are up 1%, but our key sales categories are down which indicates that consumers are still visiting us for basic maintenance, but deferring larger purchases. Again, because consumers eventually have to get these needs addressed, we would expect our traffic and sales trends to improve significantly in the coming months. For the first quarter overall, we expect comparable store sales to decline in the range of 5% to 7%. As a reminder, we are up against approximately 2% comparable store sales gains in the prior year first quarter. We expect first quarter earnings per share to be in the range of $0.35 to $0.40, which compares to $0.48 for the first quarter of fiscal 2012. For the full year, taking into account sales contributions from our first -- from our 2 first quarters as well as pending acquisitions, we expect total sales to be in the range of $750 million to $775 million and comparable store sales to be in the range of flat to positive 3 adjusted for days. Additionally, we estimate fiscal year EPS of $1.65 to $1.85, which compares to EPS of $1.69 in fiscal 2012 or EPS of $1.65 excluding the estimated $0.07 benefit from the 53rd week and the $0.03 in due diligence cost charges for the Midas field. We expect that comps will improve, but remain under pressure through the first half of the fiscal year and rebound strongly in the second half of fiscal 2013 as we were up against flat comp store sales over this period. As we move through fiscal 2013, we anticipate that we will have improved performance as customers turn to us for purchases that have been deferred. We expect gross margin in fiscal 2013 will remain under pressure, particularly in the first 2 quarters due to oil and tire cost increases partially offset by increasing our direct importing of parts and tires throughout the year. While we continue to carefully manage costs, we expect the weak comparable stores sales and the fact that fiscal 2012 was a 53-week year will offset further SG&A cost leverage provided by our acquisitions. With that said, we believe that we have not seen a better environment for accelerated growth through accretive acquisitions than we are seeing currently. While recent trends have been challenging and we are more cautious near term as a result of previously mentioned macroeconomic issues, our long-term confidence in the business and outlook for our industry and company remains very positive. There are still 240 million cars on the road in the U.S. that are getting older. Consumers still can’t work on these vehicles. The number of overall service space is decreasing and independent tire dealers that we are looking to acquire are getting older, finding it increasingly difficult to compete and worrying more and more about taxes. Importantly, we remain confident that fiscal 2013 will be a year like we saw back in fiscal 2008, where weaker sales trends, economic issues and higher costs set the stage for accelerated acquisition, which pay dividends in fiscal 2009 through 2011. This will allow us to leverage both our business model and further improve our position as the low cost trusted service provider to continue to grow the business and enhance shareholder returns. In this regard, we are pleased with the increase in our quarterly dividend we announced this morning, which is our 7th increase in the last 7 years. This increase is a reflection of our financial strength, which allows us to invest in continued growth while returning additional value directly to our shareholders as well as the board’s continued confidence in our long-term strategic plan and financial prospects. Looking over the longer term, nothing has changed in our view. Our 5-year plan continues to call for on average 15% annual top-line growth, 10% through acquisitions, 3% to 4% comps, 1% to 2% Greenfield stores. The acquisition growth will breakeven in Year 1, the $0.08 accretive Year 2, and add an additional $0.08 Year 3. Over the period that should improve our operating margins approximately 300 basis points and deliver an average of 20% bottom-line growth. Before turning the call to Cathy, I would again like to acknowledge each of Monro’s 5,300 employees, our performance is the direct result of their ability to execute well and consistently provide excellent service to our loyal customers, particularly as we enter a very challenging year, we remain steadfastly focused on growing the business both organically and through acquisitions, executing on operational initiatives, protecting our position as a low cost operator, and capitalizing on favorable industry trends despite the challenging macro environment. I believe that we are well-positioned for the long-term profitable growth and I’m confident that fiscal 2013 will continue to move us forward. With that, I’d like to turn the call over to Cathy for a more detailed review of our financial results. Cathy?

Thanks, Rob. Good morning, everybody. As Rob stated, sales for the quarter increased 13.9%. New stores, which we define as stores opened after March 27, 2010, added $11.5 million in sales, partially offsetting these increases was a decrease in sales from closed stores of approximately a $1.5 million. Comparable store sales increased 7.4%. There were 97 selling days in the current fourth quarter and 91 in the prior year quarter, adjusting for days, comparable store sales increased 7/10 of a percent as compared to the prior-year quarter when we are at 3/10 of a percent. Year-to-date comparable store sales increased 2%. Additionally, there was a sales increase of $38.4 million related to new stores, partially offsetting this sales increase with a decrease of sales from closed stores amounting to $4.5 million. Fiscal 2012, as Rob stated was a 53-week year and therefore, there were 368 selling days, as compared to 361 selling days in fiscal year 2011, adjusting for days comparable store sales increased by 1/10 of a percent in fiscal year 2012. Moving on to March 31, 2012, the company had 803 company-operated stores as compared with 781 stores at March 2011. During the quarter ended March 2012, the company opened 2 stores and closed 2 stores. Year-to-date, the company added 36 locations including 23 Vespia and 7 Terry’s Tire Town stores and sold or closed 14 locations, which includes the sale of the Central Long Island stores earlier in the fiscal year. Gross profit for the quarter ended March 2012 was $66.5 million or 38.7% of sales as compared with $60.4 million or 40.1% of sales for the quarter ended March 2011. The decrease in gross profit for the quarter ended March 2012 as a percentage of sales is due to several factors. Total material cost increased as a percentage of sales as compared to the prior year. As Rob discussed, the company experienced significant increases in oil and tire costs, as compared to the same quarter of last year and for competitive reasons, the company elected not to pass on through certain of these costs increases resulting in gross margin percentages below prior year level. The shift in mix to higher margin category, such as brakes, which had comparable store sales increases in the quarter helped to slightly offset the effect of tire and oil increases, as the cost reductions obtained through the use of lower cost direct import products. Distribution and occupancy costs which are a component of cost of sales decreased as a percentage of sales from the prior year as the company with higher overall sales was able to better leverage these largely fixed costs. Labor costs also decreased as a percentage of sales as compared to the prior year largely due to better control of payroll and improved labor efficiency as measured by sales per man hour. For the full year, gross profit was $276.4 million or 40.3% of sales as compared with $257.5 million or 40.4% of sales for fiscal 2011. The year-to-date slight improvement in gross profit is largely due to leveraging of fixed distribution and occupancy costs against higher sales this year as well as decreased labor costs, partially offset by increased material costs. Moving on to operating expenses for the quarter, they increased $3 million and were $49 million or 28.6% of sales as compared with $46 million or 30.5% of sales for the prior year quarter. When we remove the sales and operating expenses related to the extra week, operating expenses were 29.4% of sales for the quarter as compared to 30.5% last year. The 110 basis point improvement in operating expenses as a percent of sales is largely due to focused control -- focused cost control and higher sales. Direct store expenses related to the fiscal year 2011 and 2012 acquired stores accounted for the bulk of the increase in dollar spent as compared to the prior year. Expenses related to these stores increased operating expenses by $2.5 million out of the $3 million increase for the quarter. Operating expenses for fiscal 2012 increased by $5.9 million for the full year to $185 million from fiscal 2011 and were 26.9% of sales as compared to 28.1%. Removing the extra week operating expenses were 27.2% of sales versus 28.1% since last year or a 90 basis point improvement. Operating income for the quarter ended March 2012 of $17.5 million increased by 21.2% as compared to operating income of approximately $14.4 million for the prior year quarter ended March 2011 net increase as a percentage of sales from 9.5% to 10.2%. Operating income for fiscal 2012 of approximately $91.4 million for the full year increased by 16.6% as compared to operating income of approximately $78.4 million for fiscal 2011, an increase as a percentage of sales by 100 basis point from 12.3% to 13.3%. Net interest expense for the quarter ended March 2012 increased $5.3 million to $1.6 million and was relatively flat at $0.09 of a percent as a percentage of sales for the same period in the prior year. The weighted average debt outstanding for the fourth quarter of fiscal 2012 was flat as compared to the fourth quarter of last year. However, the weighted average interest rate increased by approximately 200 basis points from the prior year due to a shift to a larger percentage of debt that being capital leases versus revolver debt at a higher rate. For fiscal 2012 weighted average debt decreased by approximately $12 million and the weighted average interest rate increased by approximately 180 basis points. The effective tax rate for the quarter ended March 2012 and 2011 were 34.9% and 37.7% respectively of pre-tax income. The difference in rate relates to the accounting for uncertain tax provision, which may vary from quarter-to-quarter and year-to-year. The effective tax rate for the full fiscal year was 37% as compared to 38% respectively of pre-tax income last year. Net income for the current quarter of $7.5 million increased 27.3% over net income for the prior year quarter. Earnings per share on a diluted basis of $0.33 increased 26.9% over last year’s $0.26. For the full fiscal year, net income of $54.6 million increased 19.1% and diluted earnings per share increased 17.4% from $1.44 per share to $1.69. Moving on to our balance sheet, it remains very strong. The current ratio at 1.2:1 is comparable to fiscal 2011 year-end. In fiscal 2012, we generated $83 million of cash flow from operating activities and paid down $9 million of debt. In addition, we financed the purchase of Vespia Tire in June 2011, which as Rob mentioned added 23 stores and $36 million of annualized sales as well as the purchase of Terry’s Tire Town on October 2011, which added 7 stores and $9 million of annualized sales. As a result of the debt pay down, our debt-to-capital ratio including capital leases decreased to 14% from 16% at fiscal 2011 year-end. At the end of our fiscal year, long-term debt consisted of $5 million of outstanding revolver debt and $50 million of capital leases. As a reminder, we have $175 million revolving credit facility with a group of lenders that is committed through June 2016. Additionally, we have a $75 million accordion feature included in the agreement. The agreement bears interest at LIBOR plus a spread of 100 to 200 basis points, and we are currently paying LIBOR plus 100 basis points. The flexible agreement permits us to operate our business, including doing acquisitions without bank approval as long as we’re compliant with debt covenants, which we are fully compliant. Those terms as well as our current availability of $131 million, which doesn’t include the accordion give us a lot of flexibility to get acquisitions like Kramer and Colony done quickly. We have plenty of room under our financial covenants to do these and other acquisitions without any problem. During this fiscal year, we were also conservative with CapEx spending at about at approximately $29 million including $23 million of maintenance CapEx. The fiscal 2012 acquisitions used another $39 million of cash. Depreciation and amortization were approximately $24 million and we received $3 million from the exercise of stock options. We paid about $11 million in dividends. Inventory is down about $2 million from March 2011, due primarily to reduced tire purchases in an effort to right size stocking levels in the stores as well as improved inventory turns. We are pleased that we were able to reduce overall inventory levels in spite of vendor price increases in oil and tires as previously discussed and the addition of the inventory for the fiscal year '12 acquired stores. Additionally, we added parts inventory in an effort to improve stocking levels and the mix of inventory to reduce outside purchases buy ahead of cost increases and ensure adequate supply for longer lead times for foreign purchases. Expanding on the guidance for our fiscal year 2013, which includes the expected results from current and pending acquisitions; as Rob said, we expect sales in the range of $750 million to $775 million that reflect where the 3 comparable store sales adjusted for days. Given our wide range in the earnings per share estimate, I’m going to discuss guidance at about the midpoint of the range a $1.75 EPS. Operating margin is expected to decline 75 to 100 basis points. We are estimating at this point that gross profit will decrease about 50 basis points and SG&A will increase by about the same. This factors in sales increases coming from both comp store increases and acquisition. It also factors in some integration cost and losing some leveraging and going from the 53 week to the 52 week year. Again at about the midpoint of our range for the full year fiscal year '13, interest expansion to be about $4.5 million; EBITDA should be about a $120 million, depreciation and amortization should be about $26 million. CapEx should be approximately $28 million with maintenance CapEx around $19 million. The tax rate should be about 37% for the full year with some fluctuation between quarters. That concludes my formal remarks on the financial statements, but I wanted to talk with you about some planned selling activity that we expect from officers and directors. A few will be selling at some point prior to the end of our fiscal year, new fiscal year in connection with exercising expiring stock option and for tax and estate planning purposes. With that, I will now turn the call over to the operator for questions.

[Operator Instructions] And we will take our first question from Bret Jordan with BB&T Capital Markets.

A couple of quick questions and I guess one of them, as you look at the first quarter or the first quarter today, you talk about a minus 7 comp in the 7 weeks. You did give some color on the cadence of that, is that a trend that’s improving from something worse than that or is it generally flat April to May?

We are fairly consistent. May started out worse than April and for all our long-term investors the last 4 days have been a lot better.

Okay, I guess if you look at price year-over-year, you typically took price in April and September although it looked like you took a couple of price increases, you said January and March this year. What’s the price strategy? Did you take price again in April on service and what was the impact of price versus traffic on that comp?

We took -- Bret, this is John. We did take price on tires and service in March at about that 2% that we typically take it. So, we -- obviously this year price was more influential than traffic. Our traffic was down slightly through the year so.

Okay. And I guess if we look at the fourth quarter that 2% tire comp, what was the unit comp? I guess, because it seems like a lot of that positive was in price as opposed to the units, you look feeling for the unit transactions?

Yes, that was -- units were down mid to high single-digits.

Okay, great. And I guess as you look at your guide on comp this year, the zero to 3, is that assuming a price increase coming in the September cycle as well?

Yes, absolutely.

We’ll take our next question from Scott Stember with Sidoti & Company.

Just talking to sales so far in the first 7 weeks, could you maybe talk about the individual higher ticket items, such as brakes, tires. Is there one that’s leading the path down or they are pretty much all down in that 7% range?

Yes, it consistently sucks. But given the last 4 days, Scott, are a lot better.

Could you talk about the competition, particularly on tires about what you are seeing fourth quarter into the first quarter? Have you seen any heightened competition and when you mentioned your comments about raising prices in September was that for tires as well?

Yes. In terms of competition, I can say the tire manufacturers have said that their units year-to-date, which is calendar year-to-date are down mid to high single-digits. So, we are basically in line with that. And all the guys that we are looking to buy are experiencing very similar sales trend to what we are. So, we don’t see that we are losing share. We just think it’s kind of shitty everywhere. And in terms of September and the price increases, we look for wherever opportunities we have to increase the tire prices, because the cost continues to rise. So, we will absolutely look at what we can do in September on service and tires.

So, almost to go to lower end of your guidance, but that probably assumed that you had some trouble putting through price on tires?

I’m sorry. Say that again Scott.

If we were looking at the lower end of your guidance, would that assume that you would have trouble putting through pricing?

No, I think don’t look at the lower end. You’re going to make me cry. I would think that like this year, our tire sales were certainly the unit decline was compensated by collecting more for every tire and I would expect that to continue going forward. I think there is more risk in the near-term on traffic and people continuing to defer.

Okay, good enough. And just last question, with oil prices going up and being a headwind for you guys, could you maybe just frame out the number of oil changes that you do per year. So, we can just get an idea of what you have to contend with?

About 2.5 million and approaching 4.5 million overall vehicles a year, 2.5 million oil changes Scott.

We’ll continue on to Peter Keith with Piper Jaffray.

Robert, I guess I am a little bit confused still on the deceleration here in the last few months. You are citing some inflationary pressures in oil and food, but the reality gas prices have been coming down the last few weeks. They are actually kind of spurning now flattish to even down year-on-year. So, it just doesn’t seem like there has been any sharp inflection in consumer pressure, I guess I’m wondering maybe, is there some sort of delayed effect from the mild winter that’s maybe cause less wear and tear and therefore, the less service work here in recent months?

Yes, it could be -- I certainly have a different view and I think we’ll see what other retailers and other categories say going forward. I think certainly they repeated a weaker April. I think things, irrespective of saying gas prices are flat with last year and down a little bit over the last 2 weeks that most consumers are stretched and are not in a very strong position, irrespective of what all the people that make $0.5 million a year say they are. I think they are making 50 to 100 grand that it’s not a question of whether gas prices are $4; it cost me $50 to fill up when 3 months ago it cost me $40 and I think that’s a big factor. More than happy to blame it on weather, but I think weather is going to benefit us the end of this year and I’m probably not going to give weather credit for our great numbers. Weather is going to occur. I think the economy is weak. I think it was weak last year to your point and it’s been weak for a while and I think retail in general is going to continue to be weak regardless of what all the brilliant pundits say.

Okay, fair enough. It sounds like you’ve addressed some of the share in tires and sounds like everyone is weak in the industry. How about with some of the other products and services, do you have any other competitive comparisons to suggest you’re maintaining share in those areas?

Well, I mean, what we know certainly on brakes in Q3 and Q4 that was strong performance compared. As far as April and May, we don’t know I mean, there was a public company that was going private that, now we’ll see if they do came out with some indications that weren’t stellar, but until everyone reports we don’t know, I think some of the parts guys expressed similar concerns on replacement parts and wear and tear, but again we are focused, we don’t think we are losing share, we don’t think we are underperforming, and our job is irrespective of weather and irrespective of the consumer figuring out ways of making more money and the most important thing to us -- you might not want to hear it. If I can sign-up for a year like we are telling you this year is going to be and grow acquisitions 20%, it’s certainly served this company and its shareholders well for 3 years following us getting that kind of acquisition growth on, and the industry is strong and deferrals will come back and it will snow again in Rochester, New York. I’m a lot more concerned about whether our company can do to make the most of what’s going on out there and right now, I think John and his team are making the most out of, given a lot of acquisitions done at attractive prices that will be accretive quickly and that’s pretty good tradeoff for our business.

Okay, that’s helpful. One last question too on a related note, just on the gross margin, just thinking about the cadence on your gross margin through the year, I was having a little bit of difficulty getting to your Q1 EPS guidance, unless I’m crushing the gross margins. So, it looked like gross margin pressures to me quite heavy in the first half and then maybe kind of flatten out or get better in the second half?

Yes, that’s absolutely how we see the year. Tires and oil in the first part of the year will be a drag. And as we said, we would expect tires pending any other cost increases that come through to improve in the second half of the year and oil as well. In fact, we have some of the acquisitions that we gotten done have given us the opportunity to revisit our oil deal, which we are doing right now and we would expect any benefit from that to help the second half of the year.

We will continue on to Jon Greenbaum of Golden Tree.

I was wondering if you could please comment on the cadence that you see for same store sales performance throughout the year. So you provided guidance for Q1 and for the full year. Obviously, that implies some sort of ramp, some sort of improvement through -- in Q2 through Q4. I was hoping perhaps you could provide a little bit more detail there?

I think Q1 will be our worst, Q2 will be our second worst and Q3 and Q4 will be our best, tied to the fact that we are up against flat comps with absolutely no winner and ridiculously weak unit sales of tires as far as getting more specific. I don’t know what tomorrows sales are going to be.

Okay, and is it safe to say also following up on the previous question that margins will largely be tied to the cadence of the same store sales?

Sure. Obviously, we generate a lot of leverage in our business model and part of the weakness even though we got to 17% bottom line growth this year and relatively flat comp store sales was generated from all the operating margin improvements we’ve picked up through the acquisitions and the leverage of what occurred over the last 3 years. Comp store sales are the most profitable sale we can have and the acquisitions absolutely help sales, absolutely help operating dollars and gross margin dollars, but remember we have to sell through higher priced inventory, due diligence costs are now expensed every quarter and all of that is incorporated in our estimates all making this year -- having the sales line growth significantly while still being under pressure on the operating margin percentage with certainly, significantly increasing operating margin dollars.

Okay and then shifting gears, my last question is could you give us a sense of the type of tires that you guys are selling, the sort of ASPs that you’re generating, what brands you’re selling more than others, just I guess some additional details on the tire business?

Yes, sure. The average selling price is up this year, and we are seeing a shift to more private label tires as customers trade down and frankly as we push that as a part of increasing the direct import program. Coming into fiscal 2013, you will see us with the low cost radios or low cost tires that we import out to all of our service stores. Previously they were only in about half of our service stores and those were the Black Gold service stores and we are also bringing in -- that’s underway at the end of last fiscal year so March, April and into the first quarter timeframe. We are also bringing in another line of import tires that we expect to put into our product stream as the first step up and that would be taking away from larger manufacturers, associate brands and buy that for less sell it for the same and get that margin improvement. All of that -- that presents a value for the customer in a tough economic time for them and that’s -- so notwithstanding the cost benefits for us, we think that there is a greater opportunity to make sale there as well.

Okay. So just to be clear, you said that you’re seeing an increasing shift into private label but then you also said your ASPs are up. I would assume the private label tires carry a lower selling prices so does that mean that the sort of price increase you’re pushing through is overwhelming the negative mix shift. Am I understanding is the correctly?

Well, the mix shift is not huge. We saw about a 5% mix shift this year into the private label tires. So, our average selling price was up around $10 this year net of that shift in the mix.

[Operator Instructions] We’ll go onto Sachin Shah with Tullett Prebon.

So, I just -- I think I missed your comments on April and May, and how well that is going?

Lousy.

Lousy. Okay, and is it because of all these other conditions mild weather, gas prices still high, the weak consumer or is it some other reasons that you’re seeing this kind of follow through from the fiscal fourth quarter?

I don’t think there is anything fundamentally wrong with the industry or our offerings. I think, you can look to weather, you can look to a consumer that’s pulling back I think all of us in the category are seeing it. And I think you will, if you haven’t seen it already start to see it in retail in general. My view is that the consumers in more shape than we want to believe and that will run as course. The good news for us is you have to buy our stuff. You don’t want to buy our stuff, you don’t come and you’re excited about your new brakes, or your new tires, but you absolutely need them, if you want to run your vehicle and people or a certain group will move into buying new cars, most people go. If certain piece of the middleclass are now buying new cars, most people if they are going to start doing better are going to repair their older cars, which sits in our sweet spot. So, I think April and May at this juncture we’re worse than we expected and I commented as bad as start to a quarter as I’ve seen in my 12 years here. I do not expect it to continue, but it’s probably not like turning on a faucet, it will get progressively better and much more encouraged on the second half of the year, than we are certainly in the first quarter.

Okay. So and that’s the reason why you’ve kind of guided the low kind of consensus is -- consensus was expecting for fiscal 2013 is you’re expecting the second half to be stronger than the first half and the first half to be a little bit weaker than you expected or it seems like market was expecting before?

Well, I think as far as what we said to the market, we had our numbers for the fourth quarter and the full year. Certainly, I think the market as well as us being surprised in the beginning of April and May did not like those numbers. I think the reflection in our estimate for the year is totally encompassed in a first quarter that if you’re referring to consensus at a 5 in front of it. We did $0.48 last year and we said we’re going to do 35 to 40 in the first quarter with 6 weeks of information. There is the difference between everyone’s annual numbers and what we’re guiding to.

Okay. And you mentioned earlier about Midas and Midas was taken private you have another deal Pep Boys in the stages of going private itself, and when you said that price was higher than what you thought it was worth, I mean and that was based on specific valuation or the synergies you expected and just curious to find out like another transaction Pep Boys is going private, you know any comment on that. I mean, people see value and I was just kind of curious to see how you measure value and the fact that some of these companies are going private.

We measure value on what we can do with the business. I mean, no one has the parts distribution network we have the flexibility and ability to go overseas and start bringing products in. They distribute to their own stores that have our level of store density, they have the growth prospects to operate. As far as the Midas stores, no one has the breadth of experience running service stores the way we do. As far as how someone else comes up with value and justifies paying a given price, we certainly we are not involved in the Pep Boys deals, we said we were involved in the Midas deals and you could assume our assessment of value on the Midas deal was significantly different than the 11.50 that got it done.

We’ll take our next question from Bret Jordan with BB&T Capital Markets.

Rob. Couple of quick follow-ups and one is on the acquisition pipeline, you said you’ve got 7 non-disclosures signed now. So, that’s I guess net up one and you had called a couple out. What’s the environment looking like here, you have seen that Midas deal go off and is valuation expectation getting higher or lower given the fact that some of the M&A transactions are accelerating this year or -- and if you can talk sort of regionally, are you looking in different markets than you were previously and what kind of size range are we talking about amongst that 7?

Bret, this is John. In short, the acquisition pipeline is better than it ever has been. The 7 that we talked about -- the 7 NDAs that we talked about don’t include Colony and don’t include the LOI that we said we expect to close in August. So, if you want to do same numbers for same numbers that would be more like 9 if you include those. So, we have added 4 since January. And again, the pipeline has never been better. The reasons for that are these guys are getting older. They don’t have a succession plan. The business is getting more difficult again with the tire cost pressures that we have. These guys are all 45% to 60% tires, so even higher than we are and they don’t have the ability like we do to increase the direct imports. The business is tougher to run and they are very concerned and getting more and more concerned about taxes. The rest of this calendar year and certainly next calendar year, from an opportunity perspective, 5 of those 7 NDAs are within our footprint, 2 are adjacent to it. And so we are continuing to look within our footprint and adjacent as we always have to focus on that store density that Rob just talked about that’s key to operations and key to distribution. And from a valuation perspective, we are certainly not seeing that go up, that’s coming down, because these guys are earning less money and that’s one of the reasons that -- one of the ones we discontinued from January was Midas. The other one was because we couldn’t get to an agreement on valuation the earnings are down in nearly every case here. So…

How about range or sizes, some color or so?

They are within 5 to 40. So, similar in sizes, more deals out there, one or 2 more at the higher end of that.

Okay. And I guess you’re looking over revisiting the Ashland the oil contract, how much room is there to move? What has oil done in the terms since you renegotiated that contract last?

Yes. Well, I guess our view of it is that there is more room to move than the nascent there is, but we think that to be a 7 figure improvement for us, but we’ll let you know when we get there.

Okay. And then one last question, as you look at inventory this strategy you are going through right now, rolling tires out to all the stores. Is that going to materially increase the inventory, since you get to hold more rubber at the store level?

It will have some increase -- impact on inventory, but not material. And don’t forget, we buy or let 100 basis points over LIBOR. So, you got an awful lot of capability there to borrow inexpensively and get significant cost improvement.

And that’s going to be a private label tire strategy that you are going to put into the stores?

Yes. It’s not a Monro Muffler Brake branded tire, but…

Right. But it’s something you are direct sourcing?

Yes.

And from whom?

From a high quality manufacturer over there, I don’t want to give everybody all the answers.

And we’ll continue on to Rob Straus with Gilford Securities.

Regarding the acquisition front, if you think about the specific valuations for those smaller chains and importantly whether or not you are seeing incremental bidders for those smaller chains. Can you give us some details there and then as a follow-up and related to that question, can you discuss a little bit of your thought process on your capital structure and how you are willing to flex that for acquisitions in the future?

Sure. With regard to competition for the deals that we’re in, we haven’t seen any increase in competition on deals and over the 18, 19 deals that we’ve done, in nearly every single case we have been -- the only competition we’ve had is the sellers expectations. In the process for us to see if we can bridge that gap. So, we haven’t seen that and we are in exclusive discussions with most of these guys.

Yes, as far as the capital structure Rob, obviously, we believe in a dividend to give money back to shareholders. That being said, we are a growth company. We think the prospects for growth especially over the next couple of years are massive especially based on how small we still are and we certainly over the years if you remember around cash conquered time whenever the stock gets ridiculously stupid, we’ve stepped into the market twice to do a stock buyback, if we think the value to our shareholders is there. If you back out our capital leases, which 5 years ago wouldn’t even beyond the books, we have, what, $5 million of debt on a $300 million base or debt to caps like 2%, 14% if you include all the capital leases. So, we have plenty of room to do what we need to do. The most attractive thing for us to do today is to continue to buy companies at the right price, plug them entire business model, improve their operating model by 800 to 1,500 basis points. In every case, improve our size, improve our operating margin, improve our store density and our position within the market and remember right now with the Kramer deal, I think we are at 820 stores. We can still get 3x bigger and not leave the footprint we are in. That is the most attractive use for capital.

We will go to David Levy with Synvest [ph].

So, I just wanted to know if it’s always been company policy to include deals that haven’t closed yet in the annual guidance or if that something new that you guys are doing?

The only deals that were shared are going to close.

Okay. And you said the timing of the deal that haven’t closed yet is for August.

Second quarter.

And have you told us how large that deal is supposed to be in terms of revenue contribution.

We said it was a similar size of the 2 we announced.

So around $25 million, annualized.

That would be a similar size.

[Operator Instructions] And we will hear from Matthew Dodson [ph] with Edmunds White Partners.

I just have one quick question for you. It seems like your guidance is based on customers who were deferring tire purchases actually coming into stores and sequentially, actually needing to get their tire change. But can you help us understand why that’s going to happen, and why can’t they push that out maybe to like the winter season?

They can. I mean, we certainly have said we wouldn’t have predicted what April and May did. That being said prior to this year, we didn’t predict 3 straight years of 6% comps under the same guys of -- people during that whole period. Probably we are up against profit numbers and people weren’t going to be able to buy year-over-year at that rate. We were on a minus 3 comp, we are on and we don’t hit our numbers.

We have no additional questions. I would like to turn the conference back over to management for any additional or closing remarks.

Great. Thank you everybody for your time. I know that the call ran a little bit long, but it’s important to fill you in with everything we know and appreciate your continued support and look forward to giving you better results in the future. So, with that have a great weekend and Memorial Day. Bye.

Thank you. Again ladies and gentlemen, that does conclude today’s presentation. Thank you for your participation. You may now disconnect.