Oct 21, 2008
Executives
Caren Barbara – Financial Dynamics Robert G. Gross – Chairman of the Board & Chief Executive Officer Catherine D’Amico – Chief Financial Officer, Executive Vice President Finance & Treasurer
Analysts
Anthony Cristello – BB&T Capital Markets Scott Stember – Sidoti & Company, LLC Cid Wilson – Kevin Dann & Partners John Lawrence – Morgan, Keegan & Company, Inc. Gerard E.
Heffernan – Lord Abbett & Co. Jamie Wyland – Wyland Management Welcome to the Monroe Muffler Brake second quarter 2009 earnings conference call.
At this time all participants are in a listen only mode. Later we conduct a question and answer session and instructions will follow at that time.
(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.
Caren Barbara of FD.
Caren Barbara
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 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 discussed in the press release and the company’s filings with the SEC. These risk and uncertainties include but are not necessarily limited to uncertainties affecting retail generally, the consumer confidence in demand for order repair, risks related to leverage and debt services including sensitivity to fluctuations of interest rates, dependence on and competition within the primary markets in which the company stores are located and the need for and costs associated with store renovations and other capital expenditures.
The company undertakes no obligation to release publically any revisions to these forward-looking statements that may not be relevant events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The inclusion of any statement within this call does not constitute an admission by Monroe or any other person that the events and circumstances [inaudible] are material.
Joining us for today’s call from management are Rob Gross, Chairman and Chief Executive Officer and Cathy D’Amico, Chief Financial Officer. With these formalities out of the way I would like to turn the call over to Rob Gross.
Robert G. Gross
Thank you for joining us on today’s call. We are pleased that you are with us to discuss our second quarter 2009 performance.
After reviewing our quarterly performance, I’ll provide you with an update on our business as well as our outlook for the third quarter and full year 2009. I’ll then turn the call over to Cathy D’Amico, our Chief Financial Officer who will provide additional details on our financial results.
We are pleased at our results for the quarter were at the high end of our anticipated ranges for both comparable store sales growth and earnings per share. We are encouraged by the positive momentum that our business has sustained over the past seven months and are especially satisfied with our performance in light of the challenging economic environment.
We are also pleased to have been included in Forbes Magazine America’s 200 Best Small Companies again in 2008 as we have for four out of the past five years. Now, I’d like to review the highlights from the second quarter.
Quarterly comparable store sales grew 4.5% at the high end of our estimated range of 3% to 5%. We generated a total sales increase of 7% achieving $119.9 million in sales compared to $112 million in sales for the prior year’s second quarter.
Comparable store sales for our ProCare stores increased 6.6% for the second quarter. Net income for the second quarter was $7.7 million and earnings per share were $0.38 compared with $0.29 for the second quarter of last year, a 31% increase.
Our performance continues to be driven in large part by our solid reputation as a quality service provider and our strong relationships with our customer base who return to us regularly for value added services. As we said before, these relationships are one of our major assets.
Our customers are clearly confident that we can meet their needs and that they can depend on us to keep their vehicles running. We have found the later to be especially important when times are tough for consumers.
Sales for the quarter were driven by our effective in store execution which resulted in part from our ongoing efforts to train our staff to perform complete inspections of customer vehicles and to effectively sell needed services. We also continue to work with our customers to schedule vehicle maintenance and our marketing programs remind them of these maintenance schedules as appropriate.
Sales also continue to be positively influenced by our highly effective low cost advertising program. You may recall that we’ve expanded our advertising campaign during our first fiscal quarter with programs that we tested last fall.
These additional programs mainly entailed Internet and direct mail advertising as well as select radio advertising. We found that the programs were very successful in driving sales and traffic in the first quarter and we are pleased with the positive momentum continued in the second quarter.
We continue to carefully measure the effectiveness of our advertising programs and we regularly refresh and/or test new additions to our advertising programs. We are also pleased with our expansion in gross margin and the increased leverage on occupancy costs.
The gross margin improvement was driven by price increases that we implemented in April and September, 2008 in response to higher parts cost. We now have the pricing in place to run similar gross margins improvement quarterly for the rest of the year.
Additionally, if oil and steel commodity costs stay at current levels we would expect to see our cost of goods improve going in to next year. On top of price increases, gross margin was positively influenced by improved in stock position which enabled us to reduce out buys this quarter.
Also, we are pleased that our labor productivity increased about 7% over the last six months adding to the 46% improvement over the last nine years. This increase productivity is largely the result of better management of our labor schedules.
As I just mentioned, price increases were the most significant driver of our gross margin expansion. Store traffic was down 2.5% for the quarter as customers continued to defer purchases and delay oil changes for as long as possible in this tough economy.
However, we are satisfied with the trade off as our average collected price on an oil change rose from $21 to $25. We are continuing to run our oil change and more program which includes several free value added maintenance services with the purchase of an oil change.
As the economy improves, we believe that this program will help to drive customers back to our locations when they need their oil changed as well as when they’re in need of bigger ticket repairs. Regarding our product categories, comparable store sales increased approximately 6% for brakes, 6% for maintenance services, 7% for alignments, 4% for tires and 3% for exhausts.
We’re especially pleased with the results for the high margin brakes category where we continued to outperform the competition and have achieved three consecutive quarters of mid single digit comparable store sales growth. We believe that much of this achievement has to do with the continued success of our brakes forever sales program in which we guarantee brake pads for the life of the car and replace pads for only the cost of labor.
We are also happy to achieve significant comparable store sales growth for alignments in three of the last four quarters. As you may recall, alignments are a high margin category and tie closely to the sale of tires.
Growth in the sale of alignments along with other high ticket items such as brakes has helped to drive growth in average ticket which has increased over the past few quarters. Before I update you on our growth strategy I would like to first comment on our strong liquidity and financial flexibility which we think is important to mention in light of the current environment.
We are pleased that our business continues to generate ample cash flow and are comfortable that we ended the quarter with a solid balance sheet and sufficient working capital position. We take added comfort in our $163 million revolving line of credit which had $85 million in availability at the end of the second quarter.
The current facility is available to us until 2012. Now, for an update on our growth strategy starting first with an update on acquisitions.
As we said previously, difficult conditions for our competitors often provide us with opportunities to make value added acquisitions at reasonable costs. As such, we have been actively engaged in discussions with several potential targets and are encouraged by our pipeline of opportunities.
We would expect to announce one of these midsize deals by the end of the current quarter. The acquisition will fit our stated strategy of acquiring businesses that will strengthen our geographic footprint, increase our market share and bolster our two format store strategy.
I’ll now move to an update of some of our more recently acquired chains. I’ll start with an update on our ProCare stores which continue to exhibit positive trends and operate profitably.
ProCare’s second quarter store sales growth was 6.6% and its operating income was $900,000. Our other recently acquired businesses continue to perform in line with expectations.
These chains include the Craven and Valley Forge Tire stores that we acquired in July of 2007 and were profitable in the first 12 months as well as the Broad Elm Tire chain that we acquired in January of 2008. In addition to the successful integration of our acquired businesses we are encouraged by the strength of our organic growth strategies.
To that end, we remain focused on our Black Gold program in which we aim to expand our market share and increase sales of tires and services in our service stores. In aggregate, our 166 Black Gold service stores continued to outperform non Black Gold service stores in tire unit sales as well as in comparable store sales.
At the end of our second quarter we added 21 stores to our Black Gold program primarily in the Columbus, Ohio area and we remain on track with our stated goal of adding 25 to 50 stores to our Black Gold program during fiscal year 2009. Our intended area of focus for the fourth quarter will be Cleveland, Ohio where we have existing tire stores.
I’d now like to briefly discuss our outlook for the third quarter and fiscal year 2009. As I mentioned at the start of this call, we are encouraged by our continued solid performance and the strong momentum that we have experienced over the past seven months.
These positive trends are continuing in to the third quarter as we have achieved comparable stores sales growth for October of approximately 4% as of last weekend with ProCare stores up approximately 9%. While we certainly are cognoscente of the macro environment, we are cautiously optimistic about our outlook for the third quarter and the remainder of the year as we expect to continue producing solid results despite broader market trends.
As detailed in our press release this morning, we expect third quarter comparable store sales growth in the range of 2% to 4%. We expect third quarter EPS to range between $0.27 and $0.29 which compares with $0.25 for the third quarter of 2008.
For the full year, we now anticipate sales in the range of $460 to $465 million and comparable stores sales growth in the range of 3% to 4%. We have increased our expected fiscal year EPS range to $1.14 to $1.19 versus our previous estimate of $1.10 to $1.18.
As we mentioned at the beginning of our fiscal year although we are already a low cost operator, our goal is to reduce expenses by approximately $1 million in fiscal year 2009 and we’ll further increase our operating efficiency. As anticipated, we saved approximately $250,000 in the second quarter from these initiatives and continue to expect the cost reduction to be realized in roughly equal installments over the remainder of the year.
While we have always prided ourselves on our low cost model, we have been especially diligent in streamlining our operations in light of the difficult cost and economic environment. Before I turn the call over to Cathy, I want to reiterate that our results for the quarter and our positive momentum over the past seven months have provided us with confidence in our ability to continue to perform well as we move forward this year.
While consumer confidence remains weak, we are encouraged by several current trends that are working in our favor such as the decrease in sales of new cars, the tightening credit market for auto loans and the overall increased price consciousness of consumers which led them in choosing our service centers over the more expensive auto dealerships. The fact that gas prices have come down doesn’t hurt either.
Additionally, the long term macro trends of more cars, older cars, more complex cars, demographics and less competition remain intact. Overall, while our economic environment continues to be challenging, we are pleased at our strong commitment to providing our customers with value added services as well as our reputation as a trusted service provider has enabled us to drive growth in both the top and bottom lines as well as capture additional market share from our competition.
By staying attune to trends, carefully managing our business and reacting appropriately through this time of uncertainty, we have been able to sustain our strong position in the industry and increase our market share during the time that has been difficult for many of our competitors. This completes my overview, now I’d like to turn the call over to Cathy for a more detailed review of our financial results.
Catherine D’Amico
Sales for the quarter increased 7% or $7.9 million. As Rob stated, comparable store sales increased 4.5%.
As a reminder ProCare sales are now included in the comparable store sales numbers. New stores which we define as stores opened after March, 2007 added $4 million.
The 19 former Craven, Valley Forge and Broad Elm stores acquired last fiscal year attributed $3.3 million of the increase. The total sales of these acquired stores were $6.8 million in the second quarter of fiscal 2009 as compared to $3.5 million in the prior year quarter.
Partially offsetting this was a decrease in sales from closed stores of $.9 million. This compares to a comparable stores sales increase of 2% in the second quarter of fiscal 2008.
There were 76 selling days in both the quarter in September 2008 and September 2007. Year-to-date comp store sales have increased 5%.
New stores added $11.4 million including approximately $9.9 million from the acquired Broad Elm, Valley Forge and Craven Tire stores. Total sales for these acquired stores were $13.4 million in the first six months of fiscal 2009 as compared to $3.5 million in the first six months of last year.
Partially offsetting these increases was a decrease in sales from closed stores of approximately $1.8 million and the comp store increase of 5% for the first six months compared to a comparable store sales increase of 4.1% for the first six months of last year. At September 27, 2008 the company had 709 company operated stores as compared to 714 at September 29, 2007.
During the quarter the company closed four stores. The sales for the ProCare stores acquired in April 2006 continued to improve as Rob stated, since the acquisition and efforts continue which focus on increasing sales volumes, reducing costs and improving margins.
These stores made approximately $0.01 per share in the second quarter of fiscal 2009 as compared to breaking even in the quarter ended September, 2007. As Rob mentioned, comparable store sales for the ProCare stores for the quarter ended September, 2008 increased 6.6%.
Gross profit in the same quarter improved by 180 basis points and operating income improved by $300,000 to $900,000 as compared to the same period in the prior year. Additionally, pre-tax income increased by $500,000 to a pre-tax profit of $.4 million as compared to a pre-tax loss last year of $100,000 in the second quarter of September, 2007.
Year-to-date on a pre-tax basis, ProCare has improved $1.1 million over last year with pre-tax income of $.9 million. We are encouraged by the continuing improvement in these stores.
Gross profit for the quarter ended September, 2008 for the chain was $50.4 million or 42% of sales as compared to $45.5 million or 40.6% of sales for the quarter ended September, 2007. The increase in gross profit for the quarter ended September, 2008 as a percentage of sales is due to several factors.
Total material costs decreased slightly primarily due to decreased out buys. In addition, costs increases in various items such as oil and tires were largely offset by selling price increases in all categories.
Additionally, there was a decrease in labor costs as a percent of sales as Rob mentioned, due to improvement in technician productivity chain wide and especially in the ProCare stores, achieved or improved sales and right sizing of crews. When sales improve and with good control over technician hours, there are less subsidized or guaranteed wages because technicians are more productive thereby decreasing technician labor as a percent of sales.
Additionally, sales per man hour increased in the second quarter for the fourth consecutive year. Occupancy costs decreased four tenths of a percent as a percent of sales from the prior year as the company gained leverage with positive comparable store sales.
Gross profit for the six months ended September 27, 2008 was $101.3 million or 42.2% of sales compared with $92.2 million or 42% of sales for the six months ended September, 2007. Operating expenses were virtually flat at 30.5% as a percentage of sales for the second quarter ended September 2008 as compared to the prior year quarter where operating expenses were 30.4% of sales.
Within operating expenses selling, general and administrative expenses for the quarter ended September, 2008 increased by $3 million to $36.8 million from the prior year quarter and were 30.7% of sales as compared to 30.1% in the prior year quarter. The increase in SG&A expense as a percentage of sales is partially due to an increase in manager pay related to increase incentives in the second quarter of fiscal 2009 due to improved store performance as compared to the prior year.
Additionally, management compensation expense increased as a percent of sales as compared to the prior year due mainly to two factors, there is additional stock option and other compensation expense in the second quarter of fiscal 2009 associated with Rob’s October 2007 contract renewal. Additionally, increased management bonuses was provided in the second quarter of fiscal 2009 as compared to the prior year due to the expectation that the company will obtain required profit goals for fiscal 2009 which it did not obtain in 2008.
In addition, advertising expenses increased as a percent of sales related to the company’s efforts to improve sales and gain market share. Partially offsetting these increases were decreases in utilities expense and benefits expense as a percent of sales.
For the six months ended September, 2008 SG&A expenses increased by $7.1 million to $73.6 million from the comparable period of the prior year and were 30.6% of sales compared to 30.2% of sales for similar reasons as noted for the recent quarter. Intangible amortization for the quarter and six months ended September, 2008 remains unchanged from $.1 million and $.3 million respectively and was one tenth a percent of sales for the quarter and six months ended September 2008 and September 2007.
Gain on disposal of assets for the quarter ended September 2008 increased $.4 million from a loss of $100,000 for the prior year quarter to a gain of $300,000 for the current year quarter. Operating income for the quarter ended September, 2008 of approximately $13.8 million increased 19.8% as compared to operating income of approximately $11.5 million for the quarter ended September, 2007 and an increase as a percentage of sales from 10.3% to 11.5% for the current year quarter.
Operating income for the six months ended September 2008 of approximately $27.7 million increased by 9.5% and is compared to operating income of $25.3 million for the six months ended September 2007 and remained unchanged at 11.5% of sales for both periods. Our interest expense for the quarter ended September 2008 increased by approximately $300,000 as compared to the same period in the prior year and increased from 1.1% to 1.3% as a percentage of sales for the same period.
The weighted average debt outstanding for the quarter ended September 2008 increase by approximately $53 million over the quarter ended September 2007 primarily related to the funding of the Valley Forge, Craven and Broad Elm acquisition and the funding of the stock repurchase program last year. However, the weighted average interest rate decreased by approximately 300 basis points from the prior year.
The decrease is due to a couple of factors including a shift in the larger percentage of debt revolver versus capital leases outstanding at a lower rate as well as a decline in bank borrowing rates. As a reminder, we entered in to interest rate swap agreements for $30 million or a little less than half of our current revolver debt which swapped our floating 30 day LIBRO rate which is now 3.75% to a rate of approximately 3.28%.
Net interest expense for the six months ended September, 2008 increased by approximately $.7 million as compared to the same period in the prior year and increased from 1.1% to 1.3% as a percentage of sales for the same period. Other income for the quarter ended September, 2008 was flat as compared to the same period in the prior year for the six months ended September, 2008.
Other income decreased by $.3 million if you recall, the company received a one-time payment last fiscal year of $325,000 in a lawsuit settlement. The effective tax rate for the quarter ended September 2008 and 2007 were 38% and 37.4% respectively of pre-tax income and for the six months ended the effective tax rate were 37.8% for September 2008 and 37.3% for the six months September 2007 respectively of pre-tax income.
Net income for the quarter ended September, 2008 of $7.7 million increased 18% over the prior year quarter and earnings per share for the same period increased 31%. For the six months ended September, 2008 net income of $15.5 million increased 5.3% and diluted earnings per share increased 20.3%.
Some comments on our balance sheet, as Rob mentioned, we still maintain a very strong balance sheet. Current ratio is 1.4 to 1, comparable to last year’s second quarter and only slightly lower than year end.
The decrease from year end is due in large part to our very deliberate and close working capital management whereby we were able to increase vendor payables and reduce bank debt. In the first six months of the year we generated $31 million of cash flow from operating activities as compared to $29 million for the same period last year and we were able to pay down $24 million of debt during the first six months as compared to borrowing about $8 million in the same six months of last year.
Last year’s first half did include $11 million of stock buyback of which none occurred in this fiscal year. As a result of the debt pay down, our debt to capital ratio dropped to 35% from 42% at year end.
As we mentioned last quarter, in June of this year we finalized an increase in our committed sum on our revolving credit facility. We were able to secure an additional $38 million in no change of terms or cost of borrowing bringing our total committed sum to $163 million.
We still have $37 million more remaining in the according feature. At this time we have approximately $87 million as of today available under the facility for borrowing for acquisitions or other needs.
During the first six months of this year we have also been conservative with cap ex spending at $7.3 million. Depreciation was approximately $10 million in the first six months and we received $1 million from the exercise of stock options.
We paid about $2.4 million in dividends. Inventory is up $3.8 million from March, 2008 due primarily to the continued expansion of tire inventory in the Black Gold and other stores.
Additionally, we added inventory in an effort to improve stocking levels and mix of inventory to reduce outside purchases and buy ahead of cost increases in oil and tires. I wanted to talk to you about some activity you may see in the stock over the next couple of months.
Many of you know that Rob Gross was granted performance based stock options when he joined Monroe in December, 1998. These options have a 10 year life and will expire this calendar year at the end of November, 2008.
Rob exercised some of these options in a prior fiscal year but has 656,000 options remaining to be exercised at the beginning of fiscal 2009. In May, 2008 he held approximately 188,000 shares of Monroe stock before going out of pocket to exercise 100,000 options in June, 2008 and to pay the related taxes.
Rob will be exercising the remaining 556,000 non-qualified stock options and paying the related taxes at an approximate 44% rate over the next three months. He will do a cashless exchange with the company as is allowed by the option plan as well as sell up to 256,000 shares on the open market for any remaining tax liabilities as well as to cover his out of pocket exercise in June of this year.
Net-net, when he is finished with all of these transactions, his holdings in Monroe will increase from 188,000 shares at the beginning of this fiscal year to approximately 330,000 by the end of this fiscal year. Additionally, he will still hold options to purchase an additional 675,000 shares.
That concludes my formal remarks on the financial statements and with that I will now turn the call over to the operator for questions.
Operator
(Operator Instructions) Our first question comes from Anthony Cristello – BB&T Capital Markets.
Anthony Cristello – BB&T Capital Markets
One question, Rob your same store sales are up 5% year-to-date, October same store sales running plus 4% but your guidance is only 3% to 4% for the year. Are you anticipating a deceleration in trends even with easing year-over-year comparisons?
Or, are you just trying to be conservative? I’m just trying to gage you here a little bit.
Robert G. Gross
Well, I guess the answer Tony would be I hope we’re being conservative but with what’s going on in the marketplace and the consumer leading in to Christmas, some other macro things going on we felt we got a good seven months under our belt. If things continue as they currently are great for us and our shareholders but we didn’t want to do anything to get too far ahead of ourselves and thought being conservative in this environment would be prudent.
Anthony Cristello – BB&T Capital Markets
When you look at what you’ve done on the gross margin side and still been able to keep the cost side in check, is that something that going forward the next few quarters and even in to next year we should think that there’s no reason to believe that gross margin improvement isn’t sustainable?
Robert G. Gross
Certainly for the upcoming two quarters the gross margin improvement is sustainable. What we would hope would occur for 2010 then starting in April is with some of the commodity costs coming down the cost to us for oil, tires and steel come down and that might be the next tranche of margin improvement going in to next year.
But, certainly we would expect to see about 100 basis points gross margin improvement year-over-year for the next two quarters and that’s incorporated in to our numbers.
Anthony Cristello – BB&T Capital Markets
One of the things that, ProCare the first quarter of same store sales up over 8%, this quarter nicely a solid 6.6%. I’m just wondering when you look at the sustainability here in ProCare you talk about increasing sales volumes, reducing costs and improving margins.
Can you maybe talk to each of those three aspects and kind of tell us where you think you are in this stage of the game? And, where is the most opportunity yet to come on the ProCare side of things?
Robert G. Gross
The most opportunity going forward is getting the sales volumes up to pre-bankruptcy levels and we’ve just started that process. A piece of that is continuing to invest in advertising in those markets which we couldn’t until we replaced a lot of the people and got the stores operating effectively because the last thing you want to do is drive more traffic if your stores aren’t delivering the right experience to the customers.
I think we have the right people in the stores, they are executing well. I think we have the staffing correct which Cathy mentioned, 180 basis points in improvement in the gross margin, a lot of that being from staffing and now it’s just a matter of ramping it up and the expectation as we said all along, once we fix it is that these stores should operate like Greenfield stores with higher comp store sales going forward over the next three years than the chain as a whole.
I think we saw that in Q1 with ProCare up 8% comp versus the company up 5.6%. I think you saw it in Q2 with ProCare up 6.6% comps versus the company up 4.5% and even in October, ProCare being up 9% versus the company being up 4%.
That spread is continuing in light of the fact that half of the ProCare stores are in Ohio which is not the most buoyant geographic area we have.
Anthony Cristello – BB&T Capital Markets
When you look at where ProCare – I know you talked about being below where they were when you acquired them. How far below are they from a core Monroe store at this point?
Robert G. Gross
The ProCare stores when we acquired them were running between $625,000 and $650,000 in sales. The average Monroe store runs $525,000 to $550,000.
ProCare is on the way to getting to a sales level of the average Monroe store still with the opportunity we believe because of the good real estate and now that the operations are fixed and now that we can start advertising and bringing back customers on a chain that was running -30 comps to get to that $600,000 to $650,000 level again. Then obviously, we get a lot occupancy level, continued labor productivity level and you should see the margins start approaching Monroe’s margin long term.
Anthony Cristello – BB&T Capital Markets
It sounds like there’s a multiyear tailwind here with what’s going on at ProCare.
Robert G. Gross
Well, we screwed it up for two years so hopefully there will be a multiyear tailwind.
Anthony Cristello – BB&T Capital Markets
One other question here with respect to the Black Gold and the outperformance. How much outperformance is there right now with a Black Gold store versus a non Black Gold store?
Robert G. Gross
Especially on the tire units, the Black Gold stores are running up 5% in tire units versus a service non Black Gold stores running up .3%. The sales are about a 7 point differential with comp tire sales being up 10% in Black Gold versus 3% comp for the non Black Gold tire stores.
Overall comps are up slightly more than 1%.
Operator
Our next question comes from Scott Stember – Sidoti & Company, LLC.
Scott Stember – Sidoti & Company, LLC
Can you maybe touch on the advertising? Obviously you’ve seen some success in the last couple of quarters.
What was advertising expense as a percentage of sales this quarter versus last quarter? And, are we expecting to see any increase in advertising levels going forward?
Robert G. Gross
3.8 this quarter percent of sales. Remember we said what we expect for the full year is last year our advertising ran 3.3% of sales.
This year we expected it to come in at 3.7% of sales. You should see the same level of advertising expenditures in our Q3, that would be October, November and December and then we will access the consumer and the marketplace for January, February and March.
As you know obviously, January and February are two of our weakest months of the year and we just want to make sure while we continue to strive to grab market share which we successfully have, we want to make sure the return on investment in Q4 is there. So, you certainly won’t see an increase in advertising in Q4 above the run rate that we will have for the first nine months of this fiscal year.
You might see a decrease if we decide to hold back on some of the additional programs we put in to place the first nine months of the year depending on whether we think there is value and what the marketplace is doing.
Scott Stember – Sidoti & Company, LLC
Just heading in to the back half of the year I know there’s been a lot of concern across the board about the holiday shopping season coming up and how deferred purchases could get again. What was the experience again last year at this time heading in to the holiday season for you guys?
Robert G. Gross
Well, last year November we were up 3.3%, December we were up .9%, January we were up 2.25. So certainly not difficult comps and if you recall last year was not the most robust holiday season.
That being said, you tell me what December and January are going to bring. The good news for us is we’re starting off a low base and those are the two least important months for us.
But, certainly our guidance incorporates a certain amount of caution and hopefully things will work out better but at this juncture I don’t know what tomorrow’s going to bring. I’m so far happy with the year and certainly happy that October sales are up and I would hope November is a good month for us just based on it being a very big tire month.
From a sales mix perspective we have more stores selling tires and doing a better job of selling them.
Scott Stember – Sidoti & Company, LLC
Maybe just touch on the store closures this quarter. Do you have a full year guidance that you’ve given before?
And, what stores in what markets have been closed?
Robert G. Gross
You know, usually the way we close stores are one of two factors, is it’s a poor performing store that the lease is running out so we use that as an opportunity with very low right offs to get out of it. Or, it’s a store that a Walgreens or a CVS is attracted to because, as you know we own 190 of our real estate locations and while the store might be doing okay say making $50,000 a year, operating profit, one of those guys will come in and offer us an $800,000 or $1 million gain and a return on assets it’s just too good to pass up.
You’ll see some of those sales going on. You’ll see closures when we have an opportunity to get out of an underperforming store.
I think we’ve closed 11 stores so far this year, that’s a little bit more than normal but remember, as we mentioned with everything we were doing with the company whether its capital expenditures and the outlay for them or an opportunity to cut costs and our team pulling a million out of SG&A we would certainly look going in to an continued weak market to get rid of any potential losers we have to sure up our business to move forward.
Scott Stember – Sidoti & Company, LLC
The last question is on capital expenditures, I know a couple of years ago we were talking about a distribution upgrade or a warehouse upgrade and it was pushed off. Is that something that is going to happen this year or are you basically just trying to monitor the economy?
Robert G. Gross
It will not happen this year. We will certainly monitor it going in to next year and when we report on our 2010 capital budget depending on market conditions and the number of stores we add through acquisition we will either do it or not do it.
But, I would say if we’re going to add 30 to 50 stores you’re probably not going to see it in the 2010 capital budget. If that number starts approaching 100 stores we’re going to need to do it.
Operator
Our next question comes from Cid Wilson – Kevin Dann & Partners.
Cid Wilson – Kevin Dann & Partners
Cathy, can you repeat one more time, I didn’t write down fast enough what the cash flow numbers were, cash flow from operations and cap ex?
Catherine D’Amico
Cash flow from operations was about $31 million for the first half and in just Q2 it was about $11 million. Then, cap ex was $7.3 million for the first six months, Q2 was $3.7 million.
Cid Wilson – Kevin Dann & Partners
Do you have depreciation and amortization for the quarter?
Catherine D’Amico
Yes, the six months was $10 million and the quarter was $4.9 million.
Cid Wilson – Kevin Dann & Partners
Then one question regarding just some of the efficiencies that [inaudible] and particularly with the ProCare stores, can you tell us a little more about exactly – maybe go in to a little more color in terms of some of the shifts in the labor that you’re able to do there and where you are going to capture the efficiencies there compared to the rest of the Monroe chain?
Catherine D’Amico
Well, on the technician labor the biggest gain in gross margin of the 180 basis points by far was the improvement in technician labor. Basically as the op guys are improving sales they’re also right sizing the crew.
So, in other words if you’ve got five guys in the shop and they’re producing $1,000 a day in sales, that was last year say and now this year we’re producing $1,006 and we’ve only got four guys in the shop it’s just more productive. There’s a certain minimum guarantee you have to pay the technicians in the form of a minimum wage which you have as someone [inaudible] in.
Our guys have done a good job of keeping the best guys, there’s [inaudible] manager turnover as well, plus they’re improving sales so you can see where the productivity per man hour is improving and that’s really been the biggest gain in the ProCare stores as well as reductions in out buys as the next item where we’ve seen some significant improvements. Stocking levels are better at those stores.
We know better what they’re selling. And, the guys are doing a better job of transferring parts with neighboring Monroe and Mr.
Tire stores to reduce their out buys. So, it’s an evolution understanding how Monroe operates and our field management has done a good job of making those improvements in the stores.
The other piece would be some leverage on occupancy which is in cost of sales also. So, as sales improve rents the same, you’re going to see an improvement in margin.
Operator
Our next question comes from John Lawrence – Morgan, Keegan & Company, Inc.
John Lawrence – Morgan, Keegan & Company, Inc.
Rob, would you just to clarify Cathy’s last comments on the out buys, was most of that out buy performance on ProCare or was there some of that across the chain?
Robert G. Gross
No, obviously it’s across the chain. Certainly, ProCare has the most upside so it skews there but remember, as we’re talking about these improvements and especially 140 basis point margin improvement, ProCare again is less than 10% sales.
So even if the margin is improving dramatically, its less than 10% of the overall company sales total. We’re not talking leaps and bounds and it’s nice improvement, it’s nice that it’s accretive this year and that the Delta between what we did last year and this year is a positive but it’s not that big number.
John Lawrence – Morgan, Keegan & Company, Inc.
Just to follow that one step, the increase in the inventory to reduce the out buys just comes from the information and the data from the customer base?
Robert G. Gross
Sure. Obviously, we talk a lot about our systems helping our advertising and our logistics and certainly the fact that everyone of our stores has a seven closest stores inventory and has a shop truck and can go back and forth to pick up parts.
All those things benefit us and from a merchandising perspective we’re constantly striving to get smarter and do a better job making sure we’re in stock and I think we see some of the benefits of our efforts chain wide certainly not just in the ProCare stores.
John Lawrence – Morgan, Keegan & Company, Inc.
Secondly, on the growth plan, you’ve talked over the last several quarters about the strategy of talking to the competitors that are struggling in this environment. Has anything changed in the last 60 days in this environment with credit, etc.
as you talk acquisitions?
Robert G. Gross
As Cathy mentioned, nothing on our front so we got I guess currently $87 million up from $85 million of availability three weeks ago so we continue to generate cash flow. That money is available to us locked and loaded and we intend on using it over the next two to three months.
As far as if you’re asking do some of the sellers, are they getting more concerned that their credit is drying up, not so much as they’re highly worried about what’s going to happen with corporate tax rates or capital gains tax rates and I think that’s really what’s putting people over the edge to allow us to get to the point where we’re comfortable that we can announce one of these things and close it this quarter or the beginning of January depending on seller’s tax preferences.
Operator
Our next question comes from Gerard E. Heffernan – Lord Abbett & Co.
Gerard E. Heffernan – Lord Abbett & Co.
To go off of that last question in regards to acquisitions, given your response that the targets, the owners of these other businesses are more concerned about cap gains situations, tax situations, is that to say that most of those businesses are not in a working capital need position that short term financing or inventory spend financing is not a real big part of their business and would not be a pressure point for them to get out?
Robert G. Gross
Some of them are, I was probably more referring to the ones we’re currently working on and close to. So, what you’re saying is true for a number of them and those obviously would be ones that are performing worse.
I think what we’re seeing across the board in these guys that we’re looking at is comps are weaker, earnings are weaker, they’re getting more realistic on the price but from a cash flow perspective if you’re looking at a 20 or 40 or 60 store chain, on average these guys would own anywhere from 25% to 50% of the real estate. So, they’re not burdening the company with a full mortgage or a full rent load so from a cash flow perspective, not breaking out the real estate separately, their business is still generating cash flow.
If a financial advisor would break down the real estate piece and say look, “You could be earning this on your real estate and your business is not making a lot of money at all, why don’t you sell the business and just collect a check on your real estate and your return on investment would be significantly higher.” I think a lot of these guys would be better served.
I think as changes in taxes are coming, them and their advisors are more focused that their real estate ownership is supporting the deterioration of their business.
Gerard E. Heffernan – Lord Abbett & Co.
In regards to acquisitions, the last couple of weeks has shaken up a lot of people, a lot of management and boards have gone in to bunker mentality. Can you give us a feeling to what the mindset of your board is in regards to making acquisitions at this time?
Are they not feeling this same pressure to just sit tight and horde cash?
Robert G. Gross
No, I don’t think – I can certainly speak for myself and I believe the board in that we view this as a unique opportunity to grow the business at an accelerated pace. Our cash flow is great and getting better.
We do not have a lot of debt. We do not have any credit risk with our banks.
O Our borrowing rates are cheap and over the next year or two or however long some of the difficulties continue, and again, let’s not forget the 18 months before today were not that robust either, I think the board feels that if $460 million of sales, being a low cost operator with the ability to get three times bigger and not leave our current footprint which is a very low risk growth strategy that it would be imprudent not to grow the business during what is a obviously very attractive time for this company to grow.
Gerard E. Heffernan – Lord Abbett & Co.
The next question I have is in regards to store manager turnover. You really haven’t talked about this in a while, it was always kind of a strong point of your operation.
Can you tell us what the situation is with your store managers? What are turnover levels?
And, I imagine the ability to win market share that the capabilities of these guys are even more important today?
Robert G. Gross
Certainly, one of the things that benefits us is a bad economy and difficulty means people are less likely to switch jobs and there’s less opportunities. On the fact that we are outperforming, a lot of the marketplace makes us a stable place to work where we focus on 401K plans and healthcare benefits that a lot of others can’t offer quite as well, that helps us.
Certainly offering stock options to the top 25% of our store managers keeps the turnover as our best performing store managers at about the 15% level which is significantly better than both our average and the industry’s average and I think that continues to help us move forward. But, I think in a tough environment it’s obvious in the markets we serve we have the number one or number two market share.
We are the only guy that’s growing. We’re a good place to work if you’re married and want to take care of your family and those are the exact kind of guys that we’re looking for to build our company and certainly that same group has been instrumental in our out performance over the years.
Gerard E. Heffernan – Lord Abbett & Co.
In regards to the car dealerships really starting to struggle right now at least per the results of the public car dealership companies, is this putting you guys in a position to obtain talent from their service base?
Robert G. Gross
We go back and forth with them. If someone wants more of a family atmosphere with some flexibility in hours they will come from a car dealership to us.
We will also have a tendency to lose that 25, 26 year old single guy that’s a very good mechanic that he can go to a car dealership and make more money working there. So, on the labor front it goes back and forth and we haven’t seen any major shift in that.
Gerard E. Heffernan – Lord Abbett & Co.
In regards to the advertising, I know that a previous questioner hit this topic but just you’ve always been very pragmatic about advertising. It’s not just something you do and throw money at, you’ve always talked as to hey you know what it’s not just advertising it’s the type advertising, it’s where you do it and how you go about it.
What are you learning in that regard? What is working?
What is not working? Anything new that you’ve hit upon that you believe is going to help you towards targeting your advertising in different or newer markets going forward?
Robert G. Gross
Well certainly obviously we took the best of the best when we started testing last fall and put the programs together for this year. I mean, the difficult thing that anyone in advertising will tell you is, “I’m spending the money, 50% of its working, I’ve just got to figure out which 50%.”
So, we continue to fine tune. I think we are much further ahead of the game with our years of experience in direct mail we know that radio in markets where we can buy it inexpensively works very well.
We are sure the Internet has helped us build a base but it’s difficult to breakdown as to sales. We will do anything as we assess the third quarter and leading in to our programs and leading in to our programs of next year.
We are certainly happy with the market share gains, we’re certainly happy with maintaining traffic at basically breakeven for the first six months of this year when we know units and traffic at all of our competitors is down and we will spend time really digging in and fine tuning what we are doing. I certainly think the easy efficiency is the guys are doing a much better job getting email addresses and with that being said, every time we then send a coupon or a flyer, or a promotion to a customer via email it’s $0.01 versus $0.40 and that become very efficient for us going forward and we would expect to make continued efforts on that front.
Operator
Our last question comes from Jamie Wyland – Wyland Management.
Jamie Wyland – Wyland Management
Just one question, obviously store operations are great but driving same store traffic is the greatest opportunity moving forward, how much of that do you expect to come from new customer growth? And, do you expect to get it from the dealers that are having trouble or from other aftermarket service places?
Where is the opportunity going to be the greatest for you?
Robert G. Gross
Yes and yes. We would expect to gain traffic from the dealers strictly because there’s a lot of consolidation going on.
They’re significantly higher priced than we are today and with the consolidation they are going to be significantly less convenient than they’ve been. That being said, they’re not selling new cars so we would expect them to be, as they have been, more aggressive on the service front.
But, it is much more likely that a dealer customer is going to trade down from their $500 Lexus brake job to a $350 Monroe Lexus brake job than it is a Monroe customer is going to trade down from a full do it for me $25 oil change which includes free tire rotation and checking out your vehicle fully to a $17 do it yourself oil change with private label oil. So, us being in the middle we’re not losing much to the do it yourselfers in this environment and we’re picking up from the dealer network.
As far as from a competitive standpoint obviously we’re gaining share. I mean, traffic gains will not be great for us, our market share gains will be versus the competition and if you look at in general us running flat or plus two or minus two traffic is probably anywhere from two to five points better than anyone else we’re competing with.
We can see it in the comps, we can see it in the price increases that our customers are agreeing to pay to us because with the additional prices they’re paying us they view that they are getting more value whether it is the free tire rotation, whether it is the brakes forever program. Customers are coming back to us and we would expect those market share gains as well as the price increases implemented to stick with the hope that as costs of goods go down that becomes margin expansion for us.
But, we are never going to be a plus five traffic company. The opportunities for us are to stay diligent, run the advertising programs to maintain or slightly improve our traffic where other people are giving it up and then generate whether through price increases or next year cost of goods improvement the gross margin improvement.
The growth in the business then gets us leverage in the SG&A and you put those things together and over the next three to five years we start making our move from a 9.5% to 10% EBIT margin company to a 12% to 13% EBIT margin company.
Operator
I will now turn the call back over to Rob Gross for any closing remarks.
Robert G. Gross
We continue to work hard in a tough environment to improve our business. Certainly we like what we see in the last seven months.
We’re not taking anything for granted, it’s still a tough environment out there and we will continue to challenge ourselves and our stores to do better for the customer and continue to move the company forward over the near term and set ourselves up for what we would hope to be a nice 2010. Thank you for your support and we’ll talk to you soon.
Operator
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconferencing.