Monro, Inc. (MNRO) Q2 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Monro Inc.'s 2018 Earnings Conference Call for the Second Quarter Fiscal 2018. [Operator Instructions] And 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'd now like to introduce Ms. Effie Veres of FTI Consulting. Please go ahead, ma'am.

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's stores are located, and the need for and costs associated with store renovations and other capital expenditures. The company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof, or to reflect the occurrence of unanticipated events. The inclusion of any statement in this call does not constitute an admission by Monro or any other person that the events, or circumstances described in such statements are material. 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’m excited to be here with you on Monro's second quarter fiscal 2018 earnings call. Since joining Monro in August 1, and now officially taking on the role of CEO earlier this month, I spent a considerable amount of time with both senior leadership and our team in the field. I've had the pleasure to visit our team members and customers at over 80 stores across our markets, as well as spend time with our team members in our wholesale and commercial locations. My time in the field has underscored the positive view I have at Monro when I decided to join, a unique business model in an attractive industry with strong competitive advantages and significant room for growth. That's not to say we don't face challenges as our flat comps in the second quarter highlight. We along with the rest of the automotive aftermarket service space faced near-term headwinds from the car [parts] [ph], weather and pressure on our consumer. Regardless of when these headwinds subside, I am very confident that there is significant room for improvement at Monro that is well within our control. Today I’d like to share with you my initial assessment and our strategic priorities, as well as my view on the quarter and full-year guidance. Then I would like to turn the call over to Brian D'Ambrosia for a more detailed financial review of the quarter. Let me start to what I see as the strengths of Monro's business model. The company scale and the benefits that come with that were part of the reason I joined the company. With over 1100 owned stores and 107 franchised locations concentrated across 27 states, Monro has grown into one of the leading automotive service and tire companies in the country in what continues to be an extremely fragmented market. Monro's scale has enabled the company to become a cost leader in the industry and has brought an unparalleled import program across both parts and tires has driven double-digit operating margins for the company, and one of the broadest tire assortments in the industry. I'm committed to maintaining this cost leadership which will be an important component of driving organic growth. I'm also very excited by the enormous opportunity to continue to expand Monro' store footprint both in new and existing markets. As demonstrated over the last several years, Monro has built a strong competency with respect to disciplined acquisition and Greenfield growth. We have a dedicated corporate team with deep industry relationships that have done a nice job over the years, identify and executing on highly accretive bolt on acquisitions and Greenfield opportunities. I’m confident that this team along with my own experience grow in three automotive service formats can continue the successful execution of the strategy. Where I am most enthusiastic is about is the opportunity to apply the expertise I built in marketing and store operations across my 20 years in the industry. Based on my time in the field, I believe there is a real potential to strengthen our in-store execution and by doing so drive traffic back into our stores. Over the past few years, traffic has been a challenge. I believe by providing customers with a good and consistent overall customer experience, we can drive better customer retention which will ultimately lead to our objective of achieving higher customer lifetime value. This will enable us to deliver sustainable growth in comparable store sales which is Monro's biggest incremental earnings driver. Much of this can be accomplished by leveraging the company's current assets, as well as targeted investments in new technology. In order to meet these objectives I have identified five strategic areas of focus I would like to share with you this morning. The first centers on our store operations. We want to establish a standard in our parent store layout, merchandise strategy and in-store experience so that every store across our chain can offer the same best-in-class customer service you should expect when you come to one of our stores. That starts with simplifying our selling approach. So there is about consistent and professional across our store base. We also have the opportunity to improve our conversion especially as it relates to our ticket by optimizing our product mix with a clearly defined merchandise strategy across good, better and best product and service options. For tires, that means making sure we are relevant to all consumer price segments by leveraging our tire brand portfolio while optimizing our pricing strategy. This is supported by better in-store and online merchandising, as well as executing our customers on their tire options. For service, that means better use of our CRM database specifically leveraging what we know about our customers vehicles, their buying habits, and OEMs maintenance tables. That allows us to educate and offer customers that come in for routine maintenance, the appropriate and timely follow-on service or parts replacement according to OEM guidelines. We've already begun a comprehensive analysis across our products and service offering and will use our findings to develop our go-forward merchandise strategy and refinement of our selling approach. Our second area strategic focus is on our marketing efforts. I believe we have a significant opportunity to improve the way we engage with our customers. By further leveraging the immense amount of customer information we already have in our CRM database, I believe we can be more productive with our marketing dollars by using these data-driven insights to deliver the right message with the right product and service offer to our customers at the right time and by so doing drive higher customer retention rates. These customer retention efforts will be better supported by the initiatives we've already started including the drive card loyalty program. Our customer acquisition efforts will be supported by reallocation of our marketing spend to higher ROI channels such as digital. Additionally, I believe we should be putting forth the marketing message that more holistically encapsulates the broad range of our service offering, and by doing so allows us to stay top of mind with consumers when choosing a location to have their car serviced. Our third area of strategic focus is on our field team members. Over the last 90 days I have had the pleasure to meet many of our very skilled and hard-working Monro teammates. We want to ensure that all 7500 team members receive the best training in the industry. We also want to be able to attract and retain the best and brightest and to do so we want our team members have a clear path for advancement. To do this, we will leverage technology and implement a learning management system for our teammates capable of delivering efficient online management and technical training. As we've seen with the increased adoption of technology, vehicles are becoming more and more complex, a trend that will certainly continue. We believe this will increasingly drive consumers to outlets they trust that are also convenient continuing to shift from DIY to Do-It-For-Me market. Our scale allows our technicians to be on the cutting edge of these changes and with an enhanced training program, I believe these are trends that we can capitalize on. Our focus on our team members also extends to our staffing model at the stores. I see an opportunity to optimize the staffing and scheduling process which is currently done by hand by investing in technology to assist the store management and achieving the right balance of labor across our stores. We also want to provide managers with the right tools to evaluate and manage their store performance including comprehensive dashboards. To be clear, I believe Monro is already a very lean organization. Therefore we believe these systems will not necessarily reduce our absolute payroll but rather maximize the dollars we already spend so their business model remains lean and scalable. Turning to our four strategic focus area and looking beyond our store footprint, we are working to deliver a true omni-channel experience to our customers, one that allows them to view and purchase available tires online and seamlessly make an appointment for installation at a nearby Monro location. We believe this will better position the company and an fast-changing aftermarket landscape. Many of you've asked me how susceptible Monro is to online competition. We believe the service component of our business in the apparent immediacy that is required isolates us to a higher degree than other companies in the broader aftermarket space. We are in the need business. Customers come to us when they require immediate repairs and maintenance. This is underscored by the fact that the majority of Americans, their vehicles are the second most viable asset they won for they turn to technicians they trust. So for the small percentage of consumers who currently buy their tires from an online seller, they still need to have them installed to ensure that their vehicles are safe and they're getting the full benefit of their investment. That requires tires to be properly mounted, balanced and aligned with the right tire pressure using a monitoring system calibrated to their vehicle. This requires equipment and skills that most consumers simply do not have. As most of you know, we already have relationships with online tire sellers as one of their preferred installers. These installations are very profitable with the high average ticket that is comparable to our corporate average, and just as important half of the customer sent to us from these online sellers are new to Monro making this an important traffic driver. Once these customers are inner stores for their entire installation, we're able to inspect their vehicles, offer any additional needed services, and add them to our database so that we can engage with them through our new CRM system with the goal of building long-term customer relationships. Turning to our fifth and last area of strategic focus acquisitions. I believe that by achieving improvement in the four areas I mentioned, we are building a stronger and more easily scalable business model one that will drive more efficient acquisition integration, and ultimately higher levels of ROI. Having said that, we're not taking our foot off the gas when it comes to our pursuit of bolt-on acquisitions. We are continuing to build out our acquisition pipeline which remains robust with more than 10 NDAs on opportunities ranging from 5 to 40 stores. We are also applying the same discipline approach to acquisitions that has become a strong competitive manager of Monro. As the company previously discussed while the potential for tax reform is deferring the completion of larger transactions, the challenging dynamics in our industry are creating significant opportunities for smaller deals that we are currently pursuing. As you can see, we have a good amount of work to do but a solid foundation in which to build upon. To be sure though, these initiatives will take time to roll-out and we will not see improvement overnight. I believe enhancement in these areas are needed as Monro enters its next phase of growth, but I believe many of these initiatives can be executed by better utilization of our existing assets and by reprioritizing our capital investments. Therefore a lot while there may be targeted increases to our capital expenditures to support our strategic initiatives, we do not expect to see a significant change to our company's investment profile. Over the next few months we will be continuing our assessment and research on the areas I've mentioned. Based on these results, we will develop detailed action plan to be a thoughtfully rolled out across the organization. We look forward to providing more information on our assessment and these go forward initiatives once they've been finalized. Now let me briefly discuss our second quarter results. Our comparable store sales when excluding Hurricane Irma's impact was about flat. This was a deceleration relative to our first quarter and was below our expectations. As was the case last quarter, negative traffic was offset by higher year-over-year ticket. Additionally, our southern markets slightly outperformed our northern markets, however within our northern region we did see positive comparable store sales in our mid-Atlantic markets which was offset by continued weakness in our Midwest region. Turning to our sales by category, we experienced positive comparable store sales in our key service and repair categories with notable increases of 6% in brakes, 2% in front and shocks and exhaust and flat counts for alignments which was the first positive data point for alignments following five consecutive quarters of comp declines in this category. However, this was offset by weakness in our maintenance services category which was down by 2% year-over-year. Our tire business saw a decline in comparable sales of 2%, the result of a 4% decline in tire units partially offset by a 2% increase in ticket. We believe that softness in tire units is in line with negative trends impacting the industry demonstrated by the fact we continue to see off invoice rebates from tire manufacturers in reaction to lower industry-wide tire sellthrough. Despite lower unit sales, retail tire pricing across the majority of our markets has remained stable, a trend we expect will continue. Comparable store sales were positive in the first two months of the quarter and turn negative in September led by continued declines in our tire business. The softness has continued into October with quarter-to-date comps down approximately 3%. In light of these lower than expected results, I believe it's prudent to take a more conservative approach to full-year guidance that is based on the current run rate and does not speculate on weather. We are now guiding the midpoint of the comparable store sales guidance range for the full fiscal year to be flat excluding the benefit of the 53rd week compared to our previous guidance for a 2% increase. This guidance is based off our current run rate and implies that weather conditions for the upcoming fall and winter months be similar to the mild conditions Monro experienced last year. The incremental deleverage on our fixed costs has result to lower topline expectations has reflected in our reduced earnings per share guidance which Brian will review in more detail in a moment. While weather is and will remain a large factoring quarter-to-quarter and month-to-month performance, my goal is to be able to drive enough incremental traffic to our stores over time where it is not a leading factor. As you also likely saw in this morning's release, we have decided not to provide detailed earnings guidance for the third quarter. My focus along with the rest of the executive team is been on our strategic priorities and not on predicting short-term results particularly as we lap significant variability in month-to-month comparable store sales in both the third and fourth quarter of the prior year. The largest swing was in December 2016, which saw an increase in comparable store sales of 15% followed by a decline in January of 12%. For these reasons we’ve taken a longer term view with respect to our guidance. Before I turn the call over, I want to take this moment to say that our thoughts are with those affected by the hurricane in Florida, Texas and Puerto Rico. While we had a fair amount of store closures in our Florida market, as an organization we were relatively unscathed by Hurricane Irma. I'm especially proud that quick response of our field team members to help in their communities, I would particularly like to thank our tire choice team together with our teammates and the corporate office immediately set up an Irma relief fund to help their Florida neighbors. With that, I would now like to turn the call over to our Chief Financial Officer, Brian D'Ambrosia.

Thank you, Brett and good morning everyone. Sales for the quarter totaled $278 million representing a 13% or $32.1 million increase year-over-year in line with our guidance range. New stores defined as stores opened or acquired after March 26, 2016 added $34.4 million including sales of $29.1 million from our fiscal 2017 and fiscal 2018 acquisition. This was partially offset by a comparable store sales decrease of 0.4% and a decrease in sales from closed stores of approximately $1.5 million. The second quarter had 91 selling days in line with the prior year period. In connection with Hurricane Irma, we had 93 temporary store closures in the quarter. All of these stores have since reopened. When adjusting for these lost selling days, comparable store sales in the quarter were flat and sales from new stores were higher by approximately $0.5 million. As of September 23, 2017 the company had 1,136 company operated stores and 107 franchised locations as compared with 1097 company operated stores, and 132 franchise location as of September 24, 2016. During the quarter, we had a 23 company operated stores and closed six stores. Gross profit for the second quarter was $107.9 million or 38.8% of sales as compared with $100 million or 40.7% of sales for the prior-year period. The decrease in gross margin for the quarter was primarily due to the sales mix shift from recent acquisition. As a reminder, during fiscal 2017 we acquired certain tire and automotive repair locations that also serve commercial customers, and sell tires to customers for resale. These locations conduct tire and automotive repair activities that are similar to our retail location. However, these locations have a sales mix which differs from our retail location given the sale of commercial tires, as well as the lower gross margin of the wholesale location primarily due to the higher mix of tires sold and the fact that those tire sales do not include installation or other tire related services that are more common at our other location. On a consolidated basis, labor cost decreased as a percentage of sales as compared to the prior-year quarter due to the sales mix shift from recent acquisition. Distribution and occupancy cost increased as a percent of sales as we lost leverage on these largely fixed costs with lower comparable store sales. On a comparable store basis, gross margin increased approximately 40 basis point from the prior-year quarter. Operating expenses for the quarter increased $6 million and were $74.1 million or 26.7% of sales as compared with $68.1 million or 27.7% of sales for the prior-year period. The dollar increase is primarily due to increased expenses for 39 net new stores and $0.5 million in management transition cost. On a comparable store basis excluding management transition costs, operating expenses decreased by approximately $1.8 million, a reflection of our ability to manage the business in a period of soft sales. Operating income for the second quarter of $33.8 million increased by 5.9% as compared to operating income of $31.9 million for the same quarter last year and decreased as a percentage of sales from 13% to 12.2%. On a comparable store basis, operating margin increased approximately 60 basis points over the prior-year period. Net interest expense for the second quarter increased $1.6 million as compared to the same period last year. The weighted average debt outstanding for the second quarter of fiscal 2018 increased by approximately $37 million as compared to the second quarter of last year. This increase in debt is due to higher capital lease debt reported in connection with our fiscal 2017 and fiscal 2018 acquisition and Greenfield expansion. The weighted average interest rate for the quarter increased approximately 130 basis points year-over-year mainly due to higher interest and capital lease and financing obligations, coupled with higher LIBOR and prime interest rate as compared to the prior year period. The effective tax rate was 38.2% for the second quarter compared to 36.3% for the same period last year. The difference in the tax rate was due to a variety of factors, none of which was individually significant, an increase diluted earnings per share for the prior-year quarter by approximately $0.02 as compared to this year. Net income for the current quarter of $17.3 million decreased 1.6% year-over-year. Earnings per share on a diluted basis for the second quarter were $0.52 as compared to last year's $0.53, excluding the negative $0.02 per share impact of Hurricane Irma, and the $0.01 per share in management transition cost adjusted diluted earnings per share for the second quarter fiscal 2018 were $0.55, an increase of 3.8% 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 is comparable to year-end fiscal 2017. Inventory turns at the second quarter of fiscal 2018 improved as compared to fiscal 2017 year-end and the second quarter of fiscal 2017. During the first six months of fiscal 2018, we generated approximately $75 million of cash flow from operating activities, and reduced our debt under our revolver by approximately $29 million. Capital lease and financing obligations increased $11 million due primarily to the accounting for our fiscal 2017 and fiscal 2018 acquisitions and Greenfield expansion. At the end of the second quarter debt consisted of $153 million of outstanding revolver debt and $239 million of capital leases and financing obligations. As a result of the fiscal 2018 paydown, our debt to capital ratio including capital leases decreased slightly to 39% at September 2017 from 41% at March 2017. Excluding capital and financing leases, our debt-to-capital ratio was 20% at September 2017 and 24% at March 2017. Under our revolving credit facility, we have $600 million that is committed through January 2021. Additionally, we have $100 million accordion feature included in the revolving credit agreement. We have approximately $430 million of availability not counting the accordion. We're fully compliant with all of our debt covenants and have plenty of room under our financial covenants to add additional debt for acquisitions without any issues. All of this as well, as well as the flexibility built into our debt agreement allows us to take advantage of more and larger acquisition and makes it easy for us to complete them quickly. During the first six months of this year depreciation and amortization totaled approximately $24 million. We received $2.5 million from the exercise of stock option and we paid about $12 million in dividends. We spent approximately $18.9 million on CapEx and $14.5 million on acquisition including one to four store acquisitions completed as part of our Greenfield expansion strategy. As you saw on this morning's press release, we announced the completion of the previously announced acquisitions of 20 stores including eight from an existing Car-X franchisee. These stores fill in our existing markets of Michigan, Illinois and Indiana and are expected to add approximately $13 million in annualized sales, representing a sales mix of 95% service and 5% tires. 12 of these stores will operate under the Monro name and the remaining eight will continue to operate under the Car-X banner. These acquisitions are expected to breakeven in fiscal 2018. During the second quarter, we also opened three Greenfield locations bringing our total Greenfield store openings to 10 fiscal year-to-date. We expect to open another seven locations in the third quarter with 24 total Greenfield store openings expected for fiscal 2018. As a reminder, Greenfield stores include new construction, as well as the acquisition of one to four store operations. These locations are expected to add approximately $1 million each in annual sales. Now turning to our outlook for fiscal 2018 as Brett discussed. In light of our fiscal year-to-date comparable store sales, as well as the further weakness we experienced in October, we have revised our fiscal 2018 comparable store sales to a range of negative 1% to an increase of 1% on a 52-week basis for an increase of 1% to 3% 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 an increase of 1.5% to 2.5% on a 52-week basis. Based on the updated comparable store sales guidance, we now anticipate fiscal 2018 total sales of $1,115,000,000 to $1,145,000,000 representing an increase of 9% to 12% year-over-year. Our guidance does not assume any future acquisitions or Greenfield store openings. The updated guidance implies flat comparable store sales for the second half of fiscal 2018 at the midpoint of the 52-week range. This compares to a decline in comparable store sales of 2.8% in the second half of fiscal 2017 which saw significant topline volatility quarter-to-quarter including a 2.3% increase in comparable store sales in the third quarter offset by an 8% decrease in the fourth quarter. Now turning to cost outlook. Our fiscal 2018 guidance continues to assume a cost increase for tires and oil combined with higher tire costs for tires partially offset by lower oil costs. As Brett discussed, we continue to see off invoice rebates from tire manufacturers in response to weak industry sellthrough. Therefore we anticipate a slight moderation in our overall tire cost in the second half of the fiscal year versus our previous guidance. Given these assumptions, we expect to generate operating leverage on a comparable store sales increase above 1% on a 52-week basis. This leverage point is 50 basis points lower than the 1.5% we guided to last quarter. 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 earnings per diluted share to be in a range of $1.95 to $2.10 representing a 9.5% increase year-over-year at the midpoint of the range. This compares to our previous guidance of $2.05 to $2.20. The earnings guidance continues to include $0.10 per share in contribution from the extra week in the fourth quarter and $0.15 to $0.19 in accretion from the recently completed acquisitions. It now also includes $0.05 of management transition costs compared to the previous assumption of $0.06, as we now anticipate that the $0.01 per share difference will be realized in the first quarter of fiscal 2019. The midpoint of our earnings guidance represents flat operating margin for the fiscal year with operating margin expected to improve year-over-year in the second half due to improved results from recent acquisitions, lower material costs, continued sales execution and the impact of the extra week in fiscal 2018. This concludes my formal remarks on the financial statements. And with that, I'll now turn the call over to the operator for questions. Operator?

[Operator Instructions] And we will take our first question from Brian Nagel with Oppenheimer.

So first question I have, I guess maybe longer term in nature but with respect to acquisitions, and Brett you talked a bit about this in your prepared comments but two parts. One, how should we think about with the ongoing discussion around tax legislation, how should we think about the pace of acquisitions over the balance of this year maybe next year. And then secondarily with the initiatives you laid out, does that imply that you could be looking for either disruptions and acquisitions or maybe the list of target companies may change or maybe some change in the makeup of acquisitions?

Thanks Brian for the question. As it relates to the tax reform we discussed in my prepared comments, consistent with what the company has shared in the prior call, I think we certainly see a slowdown in the activity with larger deals where the potential for positive tax reform has significant consequences on those respective companies. So the deal pipeline I think is still rather robust in that category if you will, however the deal flow there certainly has slowed until we get some certainty out of Washington DC on that matter in particular. Having said that, as it relates to smaller deals we’ve certainly haven't seen a slowdown there. I think our pipeline is certainly robust as it was in Q1 and that was still net positive about our ability to continue to get deals done as reflected in our 20 store openings in the last quarter. Longer term - but my view is very positive on the industry and as I made the statement in my prepared comments, I believe the work that we’re going to be doing on our four priorities if you will that impacts organic growth, I think certainly supports our ability to accelerate our M&A activity going forward and deliver a stronger return profile on the acquisitions that we would do. We're going to leverage I think the time that we have here with a little bit of a lull right now with deal flow in larger transactions and we’ll focus our energy on smaller deals and working pretty aggressively on the core initiatives that’s going to impact our organic business.

And then as a quick follow-up and I apologize if you addressed this maybe more for Brian but the negative three comp you called that for the month of October anything, what are your views behind that deceleration from what we saw in the September quarter?

I think we saw significant softening in the second half of September rolling into our October month. I think we would attribute that to a couple of things, one, primarily it's in tires, and we’re seeing a slow move into the fall selling season with certainly very mild conditions that we have seen in our Northern markets, Brian, that’s a big driver of that in October.

And we will take our next question from Brett Jordan with Jefferies.

Talking about the timing of some of the internal initiatives obviously some of the big M&As off the table short-term but can you talk about optimizing price strategy and maybe some targeted increase in CapEx. Could you maybe give us some colors to when we might start seeing that happen and when it might be sort of a measurable impact?

Yes, the first statement I’d make is anything that we intend to do near term is reflected in our full-year guidance Brett, but let me digress for a second give you some context on timing for the broader initiatives that I’d laid out. As you know I’d been here now for about 90 days and basically three weeks in the Chair as CEO and I feel pretty good about the pace were moving at, and I want to complement our internal team by really being support of my onboarding here. Feel like we’ve moved pretty quick through the assessment phase and certainly leveraging some of the experience I've had from previous companies and to get us [Indiscernible] we have identified the five priority areas we’ve talked about. The work that we've got to do now as a management team is put the structure behind those strategy areas into key initiatives and with those key initiatives we will need to understand better what the timing is number one, reflective of what I would see as our organizational capability and capacity to be able to get those done. And once we establish the gating on the timing that will dictate our investment profile that we would need to support those. But I just want to amplify maybe a couple of points here, one, I feel that those investments that we’re going to make are highly targeted in nature, largely geared towards technology in particular and so I had mentioned before we have a significant amount of CapEx that we spent today on maintenance CapEx. So we see opportunities to first reallocate, reprioritize based on our current spend. But anything we would do on an incremental basis given the timing of those initiatives, we would view as pretty much in line with investment profile in the company today.

In your discussion of tire, you talked about the market getting sealed, but higher promotions as demand soften. Could you talk about whether you're seeing any shift with import versus branded tire competition? And then also maybe within that what's your mix in the quarter of brand versus import?

I will start with the last one. Our mix of brand and import was 70, 30, 70 brand 30 import which has been pretty consistent sequentially in the business. As I mentioned in my comments Brett, we're seeing pretty stable price environment at retail. It feels like market is taking a wait-and-see approach on tires and we are expecting some recovery here in the winter selling season on tires. On the cost side, as mentioned in my previous comments, we are seeing some downward movement on prices. I think part of that's reflected in our second half guidance where we've lowered our inflation hurdle on the year down to 1%. And certainly that reflects some of that downward movement, and we'd expect to see in our fourth quarter numbers. And that applies both import as well as branded tires that we're seeing movement on that.

And Brian, I guess just housekeeping, could we get the monthly comps.

Sure. July was up 0.7, August up 0.3, and September was up 1 and that reflects the - neutralizes for the hurricane.

[Operator Instructions] And we would take our next question from Matt Fassler with Goldman Sachs.

My first question relates to the gross margin. So I think on a comparable or same store basis you've disclosed gross margin up about 40 basis points in the June quarter was up 110 basis points. So can you talk about the fade in gross margin expansion on a comp basis that you saw from Q1 to Q2?

That was primarily driven by the topline performance. So, on the softer comps we lost leverage on our fixed distribution and occupancy expenses, which are up a component of our cost-of-good sold.

And any change in the in the tire profit dynamic as you think both about materials cost and about market pricing?

No, pretty consistent. I mean obviously in the quarter, based on our flow-through of our tire inventory and our turns on tire inventories, we had the full impact of the cost increases that were announced by the end of our FY'17. So that was reflected obviously in our results for the second quarter.

Brett, the second question. You've spoken to this a bit and as you've talked about both the strategic plan and as a kind of growth that you want to see. Is there any thought to a sharper slowdown to either acquisition activity or shutdown of organic growth as you try to shore up the comps store sales performance where you're getting more consistent same store sales growth that in the organization?

As I mentioned in my prepared comments, we have a dedicated team here at the company that's working pretty aggressively on M&A. And as I looked at our competency in the company, I believe we are quite good at analyzing, evaluating and integrating acquisitions. In some respects certainly with small deals we have a very focused team that's able to do that. I think that keeps us somewhat isolated where we can still maintain a focus on M&A. While we have a separate group of resources and members of our team that will be very focused on our core organic opportunities because we roll out some of these initiatives we'll talk about in the calendar year, I believe that just accelerates our capability and our performance to further integrate or assist with the integration on future deals going forward Matt. So I believe at this stage, we can do both in the company given the resources that we'll look to add in a couple strategic areas of the company.

And then one last quick one. So you may have this announcement late last week, talked about the partnership on the tires and service side and we popped around, and you are a big part of that program and as you said you would be - many programs involving installation of tires marketed by third parties online. I am not sure that this is one that you have discussed in particular in the past, but any update on the role that these installed programs through third-party online sellers are playing from on-road today?

I’ll talk strategically first about that. As I think about our e-commerce strategy, I think about this through three stages if you will. Our first stage is, we want to participate in supporting any online seller of tires, just because I believe it's a great traffic driver due to all the things I mentioned in my prepared comments of course. Phase 2, which is the phase we’re in now which we’re in the process of building out some technology, but I think will allow us to participate with those online installers in a more efficient manner and one area that this will branch into is a concept that we’re working in test fashion right now, whereby we not just install the tire but we also look to leverage our inventory that's in our supply chain today. We still got some work to do on that in particular on the IT side to drive some integration work there, but that would be kind of Phase 2 of what our e-commerce strategy would be. The third phase what I commented around in our strategic focus which is, we’re going to be pretty aggressive about building our own internal capability. Certainly we want our Monro branded formats to be first choice with consumers and be in a position to deliver a good solid omni-channel experience online for them and participate in that by installing those tires in our own brick-and-motor. So we want to cut across I think all three segments of the marketplace starting first the Phase 1 as we migrate to our own capability that will develop over time.

[Operator Instructions] And we will take our next question from Rick Nelson with Stephens.

Just to follow up on e-commerce and installation. Brett or Brian, if you could tied us the impact you see here from Amazon pushing into the tire category and if you could describe your relationship with Tire Rack as an installer and the economics that are involved being an installer for an e-commerce platform?

Maybe I’ll start with the first point first. As I mentioned as a company we have been embracing online selling and supporting that through installation for some time now, as we all know companies like Tire Rack and Tire Buyer have been in this space for quite a while. I believe on our last quarter call we have articulated what the incremental impact is to our business as a participant in that and I think couple of key data points if I look at pretty closely. One is, the types of customers that we’re seeing through that channel and when we look at our data, roughly 50% of the customers that we’re seeing for installation services are new to our brand. So again reinforces the point from my perspective is this is the nice traffic driver for us. The second point is gives us an opportunity to build a relationship with those customers in store and drive conversion, and if I look at our average ticket comparison between our company average versus install, look we are lower on a dollar basis, our company average is 160 versus 120, that we do on installs but keep in mind that the installation ticket is much higher margin because of the lack of the product component of the cost structure there. And the third piece that I like about still supporting that model is just the fact that we don't want to get those customers into our database and it gives us the opportunity to mind that data and build relationships with them over a lifetime. Switching gears and talking a little bit about Amazon, again first of all I feel like our category automotive services in the aftermarket is well insulated in this category relative to others, because of the reasons I mentioned earlier, which is, we're in the need business, we get the opportunity to develop relationships with our customers through oil changes, break service and other categories that are very important to those customers parts. And if I look at how tires are sold, certainly consumers will go online and shop for tires, but there's an awful lot of tires that gets sold through inspection in-store and we get the opportunity to convert to sell those tires. So if we want to be irrelevant I think in all channels as I mentioned we want to have a strong omni-channel approach. We want to be supportive of online retailers but certainly, we're going to leverage our own brick-and-mortar and relationships we have with our customers that I think create some pretty strong defensible barriers around this business for us.

And would you be pursuing Amazon to become an installer for that.

I forgot your last part of your question. We are in discussions with Amazon currently right now. I have a tendency to move a little bit slower methodical in that discussion for two reasons. One, I want to make certain that we have the technology capability lined up to deliver a good experience. As we move into test, we want a good experience for the consumer number one and also a good experience with Amazon number two. So we are in discussions with them. We're in and process of building our capability to make certain that this experience can be seamless, which is requiring a little behind the scenes work from a technology point of you to make that happen. But we intend to support that program.

Also I'd like to ask you about the tire comps down 2 for the quarter minus 3 for October. If you could differentiate price and unit what's happening there? And how you're thinking units are comparing to the overall market?

I would comment on - 2Q where units were down 4 and price mix was up 2, letting out to the 2 down and as we compare comps versus industry participants at least from a tire manufacturer data that we get, certainly we all see some softness. Our tire business has been particularly softer in the Midwestern and in the Great Lakes region in particular. But most recently, we see more softness in our northern stores that it typically would see some help from seasonal dynamics in October that we have yet to see at this stage.

And the car dealers with their push into tires and the elevated recall activity that that's having impact on your comps?

I think the tire dealers have been in the business now for a little over 11-12 years I think - and that was a good year and we're working pretty close with them, putting them into the tire business. So I don't think it's a new dynamic than be in a competitor in this space. When I look at the tire business, I see this -unfortunately in tires, I think it requires a consumer stimulus to get them, or a stimulus to get the consumer to know that they need tires which in some respects certainly weather is a big contributor to that fact. And I think as an industry as I mentioned before, I think there is a little bit of wait-and-see approach as it relates to the industry with some moderate expectations that we returns to some normalcy here on tires as a result of that. But having said that, I think we’re going to be very focused on the things that we can control in our business. And I do think there's opportunities for us to rethink our product stream strategy to make certain that we have products that are positioned at the right price points, to be relevant with consumers that we see in our stores and also create the right step up and conversion opportunities in store. And that will be supported with I think the right selling materials in store that allows us to help facilitate that. So, look we're just not going to wait for the industry to rebound here. We're going to do things that's well within our control to focus on that going forward.

Thanks a lot and good luck.

Thank you.

Before we move out to the next question, this is Brian, I just wanted to clarify something from earlier. I think I may have misquoted the September comp. I think I may have said that it was up one adjusted for the hurricane, I just wanted to clarify that it was down one adjusted for the hurricane. Apologize for any misunderstanding.

And we will take our next question from Carolina Jolly with Gabelli.

So, a competitor in this space is talking about vertically integrating the aftermarket and acquiring repair team. Has that pressured M&A in the space for multiples? And has, I guess the soft industry sales also has that have any effect on the M&A acquisition multiples as well?

Maybe I'll start with the second part of the question first. And I think when we look at soft industry conditions I think certainly for smaller deals, we would expect that to continue to drive interest and opportunity for us to acquire companies that have a little less scale and sophistication to deal with some pervasive industry softness. As it relates to larger deals, I think certainly what I would consider a platform acquisition, I think there has been more interest in our space which I believe reinforces the attractiveness of our industry given that level of interest. But I think as it relates to multiples, I think as I look at the market for platform deals, larger platform deals we have seen multiples move up on those kind of deals. However as it relates call it midsize deals, I think at this point we are yet to see some inflation in multiples at that level of deal.

[Operator Instructions] And it appears there are no further questions at this time. Mr. Brett Ponton, I'd like to turn the conference back to you for any additional or closing remarks sir.

Thank you. I'm honored to lead this great company and I want to thank all of our team members for their support during this transition, and over the course of my assessment. In the coming months, we'll be developing the action plans supporting the five areas of strategic focus I outlined. I look forward to updating you on our progress on our next earnings call. Thank you all for joining us today and for your early support of our new path forward for Monro. Thank you.

And ladies and gentlemen, that does conclude today's conference. I’d like to thank everyone for their participation. You may now disconnect.