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Pep Boys - Manny, Moe & Jack (NYSE:PBY)

Q4 2012 Earnings Call

April 16, 2013 8:30 am ET

Executives

Sanjay Sood - Chief Accounting Officer, Vice President and Corporate Controller

Michael R. Odell - Chief Executive Officer, President and Director

David Stern - Chief Financial Officer

Analysts

Bret David Jordan - BB&T Capital Markets, Research Division

Daniel Engel-Hall - Crédit Suisse AG, Research Division

James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

Operator

Greetings. Welcome to the Pep Boys Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Sanjay Sood. Thank you, Mr. Sood. You may now begin.

Sanjay Sood

Good morning, and thank you for participating in Pep Boys' Fourth Quarter Fiscal 2012 Earnings Conference Call. On the call with me today are Mike Odell, President and Chief Executive Officer; and David Stern, our Chief Financial Officer.

The format of the call is similar to our previous calls. First, Mike will provide opening comments regarding our results and our strategic priorities; and then Dave will review the financial performance, balance sheet and cash flows for the quarter and full year. We'll then turn the call over to the operator to moderate our question-and-answer session. The call will end at 9:30 Eastern time.

Before we begin, I'd like to remind everyone that this conference call is governed by the language at the bottom of our press release concerning forward-looking statements, as well as SEC Regulation FD. In compliance with these regulations, we are webcasting the conference call on www.investorcalendar.com. For anyone on the webcast, who does not have the financial statements, you can access them on our website, www.pepboys.com.

I will now turn the call over to Mike Odell, our President and Chief Executive Officer. Mike?

Michael R. Odell

Thanks, Sanjay. Good morning, and thank you for joining us today. We begin 2013 with a new energy and sense of purpose, guided by our growing customer insights program. While 2012 was a challenging year, we made the most of it using the settlement proceeds from our terminated go private transactions and the cash that we had generated from our operations to reduce our debt, settle our interest rate swap and pension liabilities and commence our share repurchase program. Our balance sheet and cash flow are solid.

2012 was a disappointing year from a sales and profit perspective, with quite a few nonoperating items running through the P&L. Full year results produced pretax income of $22.5 million. This included the merger termination fee net of expenses and gains on property sales, mostly offset by the settlement of our pension liability, which was previously disclosed, our debt refinancing cost, asset impairments and severance charges.

The pretax effect of these items was a net benefit of $3.9 million. The pretax income, excluding these items, was $18.6 million. 2011 pretax income was $41.6 million or $44.3 million, excluding a pretax net charge of $2.7 million comprised of an asset impairment charge and transaction expenses, partially offset by a reduction in our reserve for excess inventory. Excluding the unusual items, the decrease in profitability resulted from higher service in selling payroll and higher advertising media spend in relation to sales.

For the fourth quarter, our reported pretax loss was $20 million. This included gains on property sales, more than offset by the previously disclosed pension liability settlement and asset impairment charges. The pretax effect of these items was a charge of $18 million. The pretax loss, excluding these items, was $2.1 million. For 2011, our pretax loss was $6.0 million or $5.1 million, excluding a pretax net charge of $900,000 comprised of an asset impairment charge and transaction expenses, mostly offset by a reduction in our reserve for excess inventory.

Excluding the unusual items, the $3 million improvement in pretax profitability for the fourth quarter resulted mostly from lower interest expense, as well as a small improvement in operating income. For the full year, comparable store sales declined 2.0% with a 0.3% increase in service, offset by a 4.4% decline in retail.

During the fourth quarter, comparable store sales declined 2.6% with a 1.6% decline in service and a 3.6% decline in retail. To date, in the first quarter of 2013, comparable store sales trends have improved in both service and retail, with a low single-digit increase in service, offset by a low single-digit decline in retail.

Our strategically important service, maintenance and repair categories remain steady with increases of 1.9% for the year, 5.7% for the fourth quarter and a similar mid-single digit increase so far in 2013. In fact, all aspects of our service maintenance and repair categories have been positive.

Tire results, on the other hand, continue to fluctuate. In the fourth quarter, we declined double digits in comparable store tire sales as compared to a higher double-digit increase in the fourth quarter of 2011. However, we did hold flat in tire margin dollars. So far in 2013, tire sales have been up and down with still improved margin rates and higher margin dollars. Comparable store service customer account increases also remained healthy at 3.4% for the year, 2.7% for the fourth quarter and up mid-single digits so far in 2013.

Maintenance of newer vehicles is a significant contributor to these increases. Comparable store customer account in our service business has now been positive for 3 consecutive quarters. We do continue to see the impact of the decline in new car sales that started in 2008. Our sweet spot is vehicles between 5 and 13 years old. We see the impact of these new cars aged deeper into their normal maintenance and repair cycles. This drop in maintenance for newer cars affected oil changes first, then tires; and now, brakes. This will continue category by category with batteries next. However, the good news is that the headwind does turn into a tailwind since new car sales have increased every year since 2008. Also, while brake sales have been soft in our service and commercial businesses, brake sales in our service space has still been positive.

Vehicle complexity also continues to increase, which supports the competitive advantage that we enjoy with our technician skill level that allows them to perform the medium and heavy work that folks cannot or do not want to do for themselves. In the meantime, we have also been involved in our pricing and online experience to make it easier for customers to choose us to do it for them.

Our biggest lever is to continue to improve how we engage and care -- engage with and care for our customers. It begins with our associates and working with them to better understand and execute the fundamentals of how to build long-term relationships with customers rather than simply addressing their immediate purchase needs. Our associates are learning how to first build the kind of rapport with customers that not only leads to great satisfaction with the current transaction, but will also lead to customers choosing Pep Boys for all of their automotive needs in the future. We have reinforced our commitment to our customers to be friendly, do it right, keep our promises and show compassion. And we're thankful for the tireless efforts of our associates to serve our customers.

We have also taken steps to strengthen our senior leadership team by adding a chief customer officer to guide our strategic developments; a chief financial officer to focus on operational analytics; and importantly, a new store leader. Chris Adams joined us last month and brings with him a proven track record of building teams that deliver great customer experiences. Together, we have identified our target customer segments and have begun to educate our associates on how to deliver the experience that our target customers deserve and expect. Going forward, you will frequently hear us refer to our target customers.

As I'm sure you recall, 4 years ago, we launched our rewards program nationally. This program provides customers with a number of free services and rewards points to drive return trips to our stores. We now have over 20 million members and enough history with which to better understand our customers.

Our customer base is quite diverse given the diversity of our products and service offerings. We have parts and fluids for serious do-it-yourselfers. We have speed shops for enthusiasts. We have friendly associates and inviting sales floors for like DIYers. And we can do everything from replacing oil and engines to replacing engines for customers that want a professional to do the work for them.

We have been using this customer data to better understand our customers in terms of shopping behaviors with us and with others and also in understanding what customers want, how we can do it better, and equally important, where the greatest opportunities exist. Some of the learnings might be different from what you would expect: 1 in 7 of our transactions are service-pay transactions; 5% of our customers account for 25% of our sales. The median household income of our best customers is higher than you would expect. We have also learned where else they shop. 20% of our customers come for basic tire and oil services, but are still not devoted to us or anyone else for their repair work. They go to the dealer when it gets complicated and pay too much.

By the way, these customers account for over 1/3 of the automotive aftermarket sales. We have 3x the market and share of vehicle repairs customers, but both of them also go to the dealer or trusted independent for service. And 1/3 of our customers are true DIYers, but they count for less than 20% of our sales. So by now you probably get the point that this paints a different picture about our potential than you might have thought, and we think about it as being the best alternative to the dealer.

In Tampa, Florida, we just completed a series of changes that embrace these learnings. The first store has been completed and is a working end market test lab. The changes touch almost every aspects of our business model. It starts with our associates, who are learning how to build lasting relationships with all customers, whether service or retail, and offer solutions for all of their automotive needs.

Our stores have historically been organized for car guys and people on a mission. They can be intimidating for many customers. In this test lab in Tampa, we have created neighborhoods that appeal to our target customers. For our service customers, this includes a more inviting exterior and interior physical environment. It also has a neighborhood adjacent to the customer lounge that pulls together the products that we carry that appeal to these customers that do not necessarily have deep automotive knowledge and may not even be very interested in their car, except as a mode of transportation.

For our enthusiast customers, the new design also includes a speed shop. We just completed our 74th speed shop this month, which is a store within an existing supercenter. The speed shop targets the car guy that DIYs out of passion, not necessarily out of economic necessity. Plus, we offer the ability to install what he purchases if that's his preference.

For the core DIYer, the rear of the store caters to all of their automotive parts and fluid needs, whether they just do light maintenance or like to do it all themselves. The changes that we are testing in Tampa also include the use of technology and more tailored marketing messages and programs. So as you can see, the implications go well beyond store design and are literally changing how we go to market. As we evaluate our results in this test lab, we will consider how to bring the noncapital and capital elements to the chain, obviously with a bias toward moving faster with the noncapital elements. Our business is people, taking care of people and their cars.

Over the past 5 years, we have redeveloped our service technical and parts capabilities. As we learn more about our customers, it is clear that we are moving past the recession, and it's more about taking care of the customer first and their car second.

Our capital spending for the year is forecasted to be $65 million. This includes 31 new service and tire centers and 7 new supercenters that are located to serve our target customers. This also includes investments in technology, like Easter, to reach new customers and to better serve our target customers with service appointments, higher product knowledge and eCommerce.

Our strategy leads with service now more than ever. We still favor the fundamentals for DIFM over the long haul. The demand for maintenance and repair remains consistent, which has been driving the growth of our service customer base. We also still intend to provide a great value, but that value will be more oriented toward raising the customer experience that we deliver. There is a huge gap between the dealer experience and its cost and the rest of the automotive aftermarket with its lack of consistently positive customer experiences. We intend to own that position to fill that gap profitably and to use our retail business to further complement our repositioning.

This is an exciting time at Pep Boys. We're excited about the opportunities that abound with our target customer segment. We thank you for your continued belief in Pep Boys and for investing in our bright future.

I will now turn the call over to Dave Stern, our CFO, to review our financial results.

David Stern

Thanks, Mike. This morning, I'll review our results in both the GAAP basis and a line of business basis. Please see the last page of our press release for financial information in the line of business format. I will also review the balance sheet and cash flow.

Net loss for the fourth quarter of 2012 is $14.5 million or $0.27 per share compared to a loss of $4.4 million or $0.08 per share in the fourth quarter of 2011. As noted in the press release, we had unusual items in both years. Excluding these unusual items, the loss from continued operations before income taxes and discontinued operations improved by $3.0 million, primarily due to reduced interest expense.

Fiscal 2012 fourth quarter total sales increased by $25.5 million or 5.1% to $530.8 million from $505.3 million in the fourth quarter of fiscal 2011, primarily due to the additional week in fiscal 2012. The additional week and noncomparable store locations contributed $38.6 million to the fourth quarter sales. Comparable store sales, which excludes the additional week in the fourth quarter, declined by 2.6% or $13.1 million. Total comparable sales -- the total comparable sales decline was comprised of an increase in store service revenue of 3.2%, offset by a decrease in comparable merchandise sales of 4.1%. The decrease in comparable store sales is driven by lower comparable store customer count, partially offset by higher average transaction amount.

Gross profit for the fourth quarter of 2012 increased by $4.9 million to $117.2 million from $112.3 million in the fourth quarter of 2011. Gross profit margin, which is fully loaded with occupancy costs, warehousing and payroll, remained relatively flat at 22.1% of sales. After adjusting for the asset impairment charge in both years and the reduction in the reserve for excess inventory in the prior year, gross profit margin improved by 20 basis points to 22.4%. This improvement was driven by performance in our service and tire centers, while the gross profit margins in our supercenters were relatively flat.

Selling, general and administrative expenses, as a percentage of revenue, remained relatively flat compared to the fourth quarter of last year at 22.1%. In dollars, selling, general and administrative expenses increased by $5.1 million or 4.6% to $117.4 million from $112.3 million in the prior year, primarily due to incremental retail payroll driven by the additional week in fiscal 2012 and to the additional stores that were in operation.

During the fourth quarter, we settled and terminated our pension liabilities. We contributed $14.1 million to fully fund the pension plan on a termination basis and incurred a settlement charge of $17.8 million as referenced last quarter. Also during the quarter, we sold our regional administrative office in Los Angeles for $5.6 million and recorded a gain of $1.6 million on the transaction.

Interest expense for the fourth quarter was $4.0 million, a decrease of $2.5 million, primarily due to the reduced debt level and interest rate resulting from the refinancing that took place in the third quarter. For full year fiscal 2012, net earnings were $12.8 million or $0.24 per share compared to net earnings of $28.9 million or $0.54 per share for the full year fiscal 2011. Excluding the unusual items noted in the press release, the year-over-year decrease in pretax earnings was primarily due to lower gross profit, partially offset by reduced interest expense.

I will now turn to our results by line of business as opposed to a GAAP basis for our service center and retail operations for the fourth quarter of 2012. The service center business, which includes tire and merchandise sales, as well as service labor revenue, generated revenue of $278.6 million in the fourth quarter of 2012, an increase of 6.8% or $17.7 million over the $260.8 million recorded in the fourth quarter of 2011. This improvement was primarily due to the additional week and the noncomparable locations, which contributed $22.0 million in revenue.

Service center comparable store revenues declined by 1.6% or $4.2 million due to the decline in the average transaction amount of 4.3%, partially offset by an increase in comparable store customer account. The increase in customer accounts was due to our strength in maintenance and repair business, led by increased oil change transactions, which have a lower average transaction amount.

Service center gross profit was $47.1 million, an increase of 3.9% or $1.8 million from $45.3 million in the fourth quarter of 2011. Excluding the asset impairment charge in both years, service center gross profit, as a percentage of service center revenue, declined 17.2% from 17.7% in the same period in the prior year. Although tire revenue was down significantly, tire gross profit remained relatively flat due to an increase in gross net product margin rate. This helped to drive an increase in service center product margin rate. However, the decline in tire revenue also caused service center expenses to be leveraged.

The retail business generated sales of $252.3 million in the fourth quarter of 2012, an increase of 3.2% or $7.8 million from the $244.5 million reported in the fourth quarter of 2011. This increase was primarily due to an additional week in fiscal 2012 in noncomparable locations, which contributed $16.7 million in revenue. Retail at comparable store sales declined by 3.6% or $8.9 million as a result of a decline of 5.3% in customer accounts, partially offset by an increased average ticket.

The retail business generated gross profit of $70.2 million for the fourth quarter of 2012 versus $67.0 million for the fourth quarter of 2011. Excluding the asset impairment charge of both years and the reduction in the inventory reserve for excess inventory in the prior year, the retail gross margin rate increased to 28.2% from 27.2% in the same period of the prior year. The increase in retail gross margin is primarily due to lower occupancy costs.

Moving to balance sheet and cash flow. During fiscal 2012, cash increased by $1 million to end the year at $59.2 million. This increase was primarily due to increased cash provided by operating activities, reduced cash used in investing activities, partially offset by an increased use of cash and financing activities related to the refinancing and debt reduction in the third quarter.

Inventory at the end of fiscal 2012 was $641.2 million, an increase of $27.1 million from $614.1 million at the end of the last year. Inventory balances increased primarily due to an expanded inventory assortment in certain hard part categories, forward purchases, investments in new stores, adding speed shops to existing supercenters and the conversion of supercenters to super hubs.

Accounts payable, including the chain payable program, increased by $65.5 million to $394.4 million at the end of fiscal 2012 from $328.9 million at the end of fiscal 2011. The accounts payable to inventory ratio increased to 61.5% from 53.6% at the end of the prior year, primarily due to improved vendor payment terms and expanded trade payable program. Inventories, net of accounts payable, including the trade payable program, decreased by $38.4 million, which drove a decrease in working capital of $40.1 million.

Fiscal 2012 capital expenditures were $54.7 million compared to $74.7 million in fiscal 2011. 2012 capital expenditures primarily consisted of 20 service tire centers, 6 supercenters, the conversion of 7 supercenters into super hubs, the addition of 17 speed shops within the existing supercenters, information technology enhancements and our eCommerce initiatives and parts catalog enhancements as well as our regular facility improvements. Net property and equipment declined by $39.1 million to $657.3 million, primarily due to depreciation exceeding capital expenditures and the $10.6 million asset impairment charge recorded during the fiscal year.

As of fiscal 2012 year end, debt was $200 million, a decline of $95.1 million from the prior year end. This decline is due to reduction in debt that occurred concurrently with the refinancing in the third quarter of fiscal 2012. At the end of the year, there was $141.2 million of availability under our revolving credit facility.

In the fourth quarter of 2012, the Board of Directors authorized a program to repurchase up to $50 million of the company's common stock. During fourth quarter, we used $300,000 to repurchase shares under that program. In fiscal 2012, cash flow was -- free cash flow was $99.9 million compared to negative free cash flow of $29.4 million fiscal 2011. Free cash flow is defined as cash from continuing activities, plus net amounts financed under our trade payable program, which is included in cash flows from financing activities, plus cash flow from investing activities, share repurchases and dividends. Our prior year cash flows included cash paid for acquisitions of $42.9 million and dividend payments of $6.3 million.

Looking forward, we have no significant debt maturities until 2018. We anticipate capital expenditures of approximately $65 million in 2013. These include the addition of 38 new locations, 31 of which will be service and tire centers and the remaining 7 will be supercenters; the conversion of 15 supercenters into super hubs; the addition of 50 speed shops to existing supercenters; information technology enhancements to improve the customer experience and required expenditures for our existing stores, office and distribution centers. These expenditures are expected to be funded by cash on hand, net of cash generated from operating activities. And additional capacity, if needed, exists under our line of credit.

With our refinancing complete and pension liabilities settled, we are in a strong position to invest in the business, focus on our target customers and grow the service market share.

I'll now turn the call over to the operator to begin the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Bret Jordan of BB&T Capital Markets.

Bret David Jordan - BB&T Capital Markets, Research Division

A couple of quick questions here. And one of them are on the tire margin trend as we came out of the fourth quarter, there's some sales headwinds. What are you seeing in your input tire pricing? I guess if we look year-over-year, what is the decrease in your cost of goods or maybe some more granularity on what you're seeing on margin pickup in the current first quarter?

Michael R. Odell

It's -- if I looked at the fourth quarter -- deal with that year-over-year first. We were about flat, maybe down slightly overall on the tire -- on the average cost per tire. We had some decreases in there, but we also had some mixed shifts, but it all blended out. It blended out to about flat, flat on the cost per unit. But on the pricing front, we got -- what was it? It was about mid-single digit increase in pricing in the fourth quarter. As we look to the first quarter, it looks like both pricing and costs have come down a little bit in line with one another, holding the rate that we experienced in the fourth quarter.

Bret David Jordan - BB&T Capital Markets, Research Division

Okay. And the new Tampa store, the test store, is there significant CapEx to convert a traditional big box into this new format?

Michael R. Odell

There is a CapEx. Obviously, this first one had a lot of prototype in it, so that's not -- what we spent on that store is not what we expect to spend going forward. First step right now is to monitor the results for this store in terms of what works, doesn't work, how the customers respond and then to expand it to the rest of the Tampa market at a lower cost than the initial prototype. So I'm not quite prepared to disclose what those numbers are because we got a lot of value engineering to do to figure out exactly what's meaningful to a customer. But yes, it is in line with, I guess, a remodel of the store in terms of what it would cost. Having said that, we're 3 weeks complete on this first store. And we like what we see so far, but we're still way early in the profit.

Bret David Jordan - BB&T Capital Markets, Research Division

Okay. And then one last question, I guess your thoughts on the share repurchase program, a few hundred thousand dollars spend in the fourth quarter. Is there sort of a, is there a internal thought on pricing? Or I guess, your level of enthusiasm for buying the stock back, was there something that kept you from buying more back in the fourth quarter, or is it -- how do you think about that?

David Stern

As we announced, Bret, the board authorized the program in December. Since we knew we were entering a time in which the trading window would otherwise be closed, we initiated a 10b5-1 plan to initiate that buyback. And since that time, our shares and the market, in aggregate, have been trading at higher prices. Given our trading window restrictions, we couldn't make purchases outside of that plan until after our Q1 call, which is typically takes place in mid-June. So at this point, we're continuing to operate on the plan that we put in place just after the board made the authorization.

Operator

Our next question is from the line of Simeon Gutman with Credit Suisse Group.

Daniel Engel-Hall - Crédit Suisse AG, Research Division

This is actually Dan Engel-Hall filling in for Simeon. We just want to know, I know in the prepared remarks, you clearly emphasized service. But it feels like, at least, 1 of the 3 big parts players that have traditionally been a little more distribution or commercial focus, is starting to step up the emphasis on retail. Can you comment on if you're seeing an increase in competition there?

Michael R. Odell

Say that one again?

Daniel Engel-Hall - Crédit Suisse AG, Research Division

I guess just, in terms of the retail business, it feels like 1 of the big 3 parts players that have traditionally been more commercial focused is starting to step up the emphasis on retail. Can you just comment on if you're seeing any increase competition in retail?

Michael R. Odell

Yes, I'm not sure who's actually more focused, shifting focus more towards DIY than commercial. DIY has been challenged, continues to be challenged with long term. I mean, we see consumers continuing to shift to wanting someone to do it for them largely out of vehicle complexity. So we continue to see the trend to be definitely favor DIFM over DIY. The thing about for us, obviously, DIFM is us doing the work, but really the competitive set, most of their comments target about them selling into the DIFM channel.

Daniel Engel-Hall - Crédit Suisse AG, Research Division

Right. Just one more follow-up, if it's all right? Kind of unrelated, but are you seeing anything regionally maybe outside of weather, in terms of an inflection either positively or negatively in specific areas or markets?

Michael R. Odell

It has been -- look, our weakest, weaker markets in the fourth quarter and into the start of this year was more in the northern, kind of the mid-Atlantic, the Northeast, the North Central, which are the colder climates. As we get into spring, we're seeing more normalization across the country.

Operator

[Operator Instructions] Our next question is from the line of James Albertine of Stifel.

James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division

Just trying to parse out the question that was asked a moment ago on weather. But you've got 20 million rewards members now, a ton of data that you're mining consistently to drive merchandising and drive opportunities within the stores. Just trying to get a sense of what you're seeing with respect to folks that may have deferred maintenance for the last several years given milder weather trends. What are you seeing given the colder temps that we saw this year on a year-over-year basis? And as weather warms up this spring, for parts breakage, inflection of deferred maintenance, if you will, standpoint.

Michael R. Odell

I wouldn't say that we've seen a major inflection or a change from a consumer mindset in terms of, there's folks who can afford to -- and spend the money to maintain or repair their vehicles, and there's folks that are more strapped. Obviously, the milder winter -- and by milder, really I'm speaking more about the kind of the cold and the freeze that we saw in the roads that causes the potholes, which obviously causes the wear and tear as well as the salt from cleaning from when it snows. There's been less weather that would cause less wear and tear. Now that started over a year ago, so it's not -- I think as we get into the spring, it won't necessarily be worse than last year because the weather wasn't all that significantly different, but surely, it wasn't better from the weather conditions to drive the business. But from a consumer mindset I don't really see any really change or inflection points as you say, in terms of their mindset. That's one of the things that's important with the customer segmentation is because the target customers and the ones that drive the biggest share of our sales and profits are -- have higher incomes. They're more into the 80s, 90s and 100s in terms of their types of income. And they've got the means to be able to maintain and repair their vehicles, and they need to because they need to keep their lives moving in terms of getting to work, taking care of the kids, et cetera; whereas at the lower end, which is obviously more DIY oriented, but a lot of them were service customers as well. That's where we see more stress than more deferral. So it's just like a lot of parts of the U.S. economy where you've got different segments of the population, takes in different situations and responding accordingly.

James J. Albertine - Stifel, Nicolaus & Co., Inc., Research Division

Just 2 quick housekeeping items. You mentioned 20 million rewards members at the latest count. Just what that was this time last year, I guess would be the first part of that. And then separately, just in clarification, you had mentioned some mix shift from the tires as it pertains to margins. But you also noted, I think, if I have this right, pricing was up mid-single digits year-over-year. So I'm just wondering if you could clarify a little bit more on the mix shift as -- whether that's not what's driving pricing higher.

Michael R. Odell

On the -- in terms of the rewards customers, I may -- remember, I may not be exactly right, but I think we were probably about 16 million, 17 million this time of year. And I'm sure you can call up an old investor deck to get it. But I think if I was to look a year ago, we'd probably be in that range. In terms of the mix shift, a lot of that mix shift, it's not necessarily consumer driven, but rather the mix that we brought into our stores. So we've obviously, historically been heavily private labeled and then with Cooper and Hankook as our significant nationally known and named brands. And over the past couple of years, we've added other brands, including Michelin on a initial basis here in the Philadelphia market. Plus with some of our acquisitions, we did more in terms of special order tires. And so it's been the offering that we have per customer, having more named brands options at higher price points as well as obviously the proliferation of sizes and the larger sizes come with them, higher price points. So it's really a mix of what we have to offer to our customers that, again, raised both the price points, as well as the cost. But at the same point in time, we were able to enhance our margins during the fourth quarter, which had to happen because in the fourth quarter of the prior year, we had taken a significant decline in the profitability of our tire business. So it's really getting back closer to where we were before.

Operator

Our next question comes from the line of Ronald Bookbinder of Benchmark Company.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

On the traffic in the retail stores, what was the traffic, and what is holding back traffic in the retail stores?

Michael R. Odell

Go ahead. David's going to respond.

David Stern

Sure. For the quarter, traffic on the retail side was down 5.3%, and that was somewhat offset by an increase in the average ticket of 1.7%. So retail line of business had a negative comp of 3.6% in aggregate.

Michael R. Odell

There's a -- in terms of -- the biggest area where we had the decline in customer count, not that it accounts for all of it, but the largest one we had was actually in DIY oil changes. And we think actually there's some, probably some channel shift going on, on DIY oil changes. So I'm not sure if anyone else picks up that share other than the DIFM because the price point has become so narrow in terms of the gap between paying someone to change oil versus the cost to do it yourself.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

So is that part of the shift that you were talking about going from the retail store to the service center?

David Stern

That's it. That's one element of it, yes.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And one maybe on the service side, while traffic customer accounts continued positive, I think you said for the third straight quarter, that the average ticket seems to be down. What are they spending less on, if they're coming in more?

David Stern

That's true. That's purely driven by the tire mix. Tires, it has a lower margin associated with it, but it's a bigger ticket. So in terms of -- we're continuing to grow the ticket in maintenance and repair. It's better [ph] than the fact that tires was down double digits in the fourth quarter that causes the mix shifts that makes it appear, so they're spending -- well, they are spending less obviously, but it's not because they're deferring or declining more services. It's really the mix shift away from tires.

Michael R. Odell

And also, there's the increase in oil transactions that we've had on the service side, which drives higher customer count, but it's a lower average ticket.

Ronald Bookbinder - The Benchmark Company, LLC, Research Division

And looking forward, you talked about that the tire business seems to be getting more price competitive. While holding on to the margins of Q4, how do you see that playing out through the rest of the year?

Michael R. Odell

Yes, I wouldn't necessarily call it more price competitive. Tires has always been a price competitive segment of the business. And obviously, with the web capabilities, over 2/3 of customers doing their searches before they go online, pricing transparency is still significant in the tires. In terms of how do we see it playing out, obviously, we're -- we continue to look every day to control our costs if that gets decreases and to expand our margins. But at the same time, we try to make sure that we are staying competitive. So it's hard to protect that. I don't see any undue pressure from -- compared to what we were going through maybe a year ago, but I think it's always going to be a day-to-day and market-to-market combat.

Operator

Our next question is a follow-up from the line of Bret Jordan of BB&T Capital Markets.

Bret David Jordan - BB&T Capital Markets, Research Division

A couple of housekeeping questions. I guess where do you see depreciation and amortization this year and interest expense?

David Stern

Interest expense will be in the range of about $11 million or so. And we haven't given guidance regarding depreciation. Expenses, they've been fairly consistent over the past couple of years.

Michael R. Odell

I can't think of why it will be much different than it was.

David Stern

No, it been fairly consistent.

Bret David Jordan - BB&T Capital Markets, Research Division

Okay. And then I guess on tires, if you look at your tire mix, what percent, maybe to a year ago, was in branded since your branded strategy seems to have ramped up a bit in the last year?

Michael R. Odell

Let's see. We have, we now have about -- in 2012, we had about 25%. I'm going to answer the question maybe a little differently than you asked it because that's what, the number I have with me. About 25% of our tire sales are being sourced differently than they would have been a year ago or 2 years ago. So if you could take -- go back to 2010 when we had primarily just 2 sources, that accounted for high 90% of our sales. They now account for about 75% of our sales.

Bret David Jordan - BB&T Capital Markets, Research Division

And is there a meaningfully different margins between those traditionally sourced versus the 25% that is alternatively sourced?

Michael R. Odell

There's a lot of variation depending on which tires, but obviously, part of it is just having more sources. It increases the availability for us. But I'd say at the end of the day, their -- the margin structures aren't materially different.

Operator

There are no further questions at this time. I'd like to turn the floor back to management for closing comments.

Michael R. Odell

Just thank you for all your questions. Thanks for your interest and look forward to seeing a number of you when we're on the road next week. And thanks for your time today.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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