G&K Services' (GK) CEO Doug Milroy on Q3 2016 Results - Earnings Call Transcript

| About: G&K Services, (GK)

G&K Services, Inc. (NASDAQ:GK)

Q3 2016 Earnings Conference Call

April 26, 2016 11:00 AM ET

Executives

Jeff Huebschen - Director, IR

Doug Milroy - Chairman, CEO

Tracy Jokinen - CFO

Analysts

Joe Box - KeyBanc Capital Markets

Andrew Wittmann - JPMorgan

Andrew Steinerman - JPMorgan

Kevin Steinke - Barrington Research

Matt Young - Morningstar

Operator

Good morning. My name is Brandi and I will be your conference operator today. At this time, I’d like to welcome everyone to the G&K Third Quarter Fiscal Year 2016 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I’d now like to turn the conference over to Mr. Jeff Huebschen. Please go ahead sir.

Jeff Huebschen

Good morning and thank you for joining us for G&K Services’ third quarter fiscal 2016 earnings call. With me today are Doug Milroy, G&K's Chairman and Chief Executive Officer; and Tracy Jokinen, Chief Financial Officer.

Before we begin the call, I'd like to remind everyone that statements made today concerning our intentions, expectations or predictions about future results or events are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect our current expectations and are subject to risks and uncertainties that could cause actual results or events to vary from stated expectations. You are cautioned not to place undue reliance on these statements and we undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Information concerning potential factors that could affect G&K and our future financial results is included in our most recent annual report on Form 10-K and in subsequent SEC filings.

During this call, we will reference certain non-GAAP financial measures, a reconciliation of these non-GAAP measures to the nearest GAAP measures is provided in the earnings release we issued this morning and is available on our Web site. A replay of this call will be available later today and will be available through May 26. You may access the replay by visiting the Investor Relations section of our Web site.

So with that said, I'd like to turn the call over to you, Doug.

Doug Milroy

Thanks, Jeff, and thank you everyone for calling in today. We know it’s especially busy day, busy week on the street, so we appreciate you making the time. You no doubt have already seen our team delivered another very strong quarter. So we’re obviously glad to have the chance to talk with you about it.

I’m going to take you through some of the highlights of the quarter, talk a little bit about the market and economic trends we see ourselves in, touch on our game plan and the role it’s playing in our continuing success. And after I cover those three things, Tracy will take you through the financials in more detail.

So with that, to the quarter, we’d clearly characterize the quarter as another quarter of strong execution. We had mid single-digit organic growth again. Good progress in the quarter toward our 15% goals. Operating margin up 70 basis points, return on invested capital was up 70 basis points. That’s a string now of 16 quarters of year-over-year improvements in both those measures, something here that or something the team here is pretty proud of.

It shows up in double-digit earnings per share growth at 10%. And not surprisingly very strong cash flow. In fact, we’re on track to have the highest full-year operating cash flow in our Company’s history and that’s obviously terrific. That allows us to continue to invest in our business as we’re, made good smart investments at Company up for the long-term and allows us to continue increasing our cash returns to shareholders as we did again this quarter.

So overall, I’d say a strong quarter. Frankly, the kind of results you’ve come to expect from this team. When I look at the market, the economy we’re playing in, I’d say the quarter felt familiar. We saw again the volatility of our game plan. Its good execution. It’s focused on the right things. And again, this quarter it drove really solid results.

When we look externally, we see a mixed bag, very mixed bag in the economy. Clearly we’re getting a tailwind spell from lower fuel prices will lap that here shortly. That doesn't last forever, but we still have a little tailwind there. And the headwinds we see and we've spoken about in the past are very real and very real again this quarter.

FX clearly remains a headwind. We saw a little strengthening in the Canadian dollar and in recent weeks, but still a significant negative impact on a year-over-year basis for Q3. And as you know you read the same things we do as you know our end markets remain challenging.

Our experience recently is very consistent with the headlines you see. We continue to see losses in customers in energy and energy-related markets. And again we see softness in manufacturing and other core industrial customer base. And the net of all that is, it’s clearly putting some pressure on growth.

As we look ahead at those trends near-term, frankly our expectation is more of the same. From an external perspective, I think next quarter is going to look a lot like this one. Beyond that, I guess, I’d say our crystal ball gets a little cloudier probably along with everyone else’s, but net-net its probably going to continue to pressure growth.

The good news in that story, I guess, is we’re used to. It’s been a really long time since we've seen what you could describe as a robust economy and again and again we figured it out and we will continue to do that, and you know how we do that. It is our game plan. It’s the fundamental strength of this business model and it’s our game plan for executing on it.

So I remain confident that even if the economy stays fairly choppy, we will continue to drive good progress toward our 15/5 goals. We’re going to stay very focused on driving profitable growth. We’ve got a good mix of strong growth initiatives underway and planned that will underpin that.

We are going to stay focused on driving margins and returns. We are going to maintain the really good cost discipline we’ve driven into this business, and we’re going to keep our focus on operational excellence and I think the quarter demonstrates that.

Our productivity again reached new heights in the quarter with Q3 being an all-time record for productivity in this Company. That focused, I’m confident as I said earlier, when we look out to the full-year cash flow, that focus will continue to produce really strong cash flow.

It is absolutely a hallmark of this business model and we’ve continued to be very disciplined in how we use that cash and we will keep putting that cash to work very thoughtfully making good investments in this business that set us up for the long-term. We will continue to steward a strong balance sheet and we will continue to return a significant portion of that free cash to our shareholders.

So, in summary, it was another strong quarter. We’re on track to deliver very solid full-year results. When we look ahead, I got to tell you the economy looks challenging, but our team, our game plan, we will deal with that. And I'm confident that we will continue to make really good progress toward our 15/5 goals.

So what that, Tracy will take you through the details.

Tracy Jokinen

Okay. Thanks, Doug. This morning I’ll provide more details on our third quarter results and also give an update on our outlook.

So let's start with results for the quarter. Revenue grew 2.5% to $239 million; organic growth for the quarter was 3.9%. Our organic growth was again partially offset by foreign currency exchange, which reduced revenue growth by 1.6%.

Looking at the drivers of organic growth, pricing continues to contribute. Year-to-date customer retention is in line with last year. And year-to-date new account sales are near last year’s record level, although the third quarter was a bit softer than the first half of the fiscal year.

A net loss of uniform wears at existing accounts was the biggest detractor from growth. We continue to see significant wear losses with oil and gas and other mining customers. And there is clearly some spillover into related markets. We also saw net wear losses outside of oil and gas, primarily with our manufacturing related customers.

Switching to profitability, third quarter operating income grew 8% to $30 million. Operating margin improved 70 basis points to 12.7% driven by lower energy costs, decreased workers comp expenses, and leverage from our revenue growth. These gains were partially offset by higher rental merchandise expense, the impact of lost uniform wears and the negative impact of the lower Canadian exchange rates.

Looking at the non-operating lines of our income statement, interest expense and the tax rate were essentially unchanged from last year’s third quarter. The diluted share count was lower as we’re seeing the positive impact of our share repurchase program.

Putting it altogether we delivered another quarter of double-digit adjusted earnings growth with earnings reaching $0.89 per diluted share. We also achieved solid improvement in return on invested capital, which was up 70 basis points to 12.4%.

Shifting to the balance sheet and cash flow statement, our financial position remains solid. Cash flow was very strong this quarter, driving year-to-date cash from operations to $96 million. Through three quarters we’ve already surpassed our full-year cash from operations in fiscal 2015 and we’re on track to deliver the highest operating cash flow in G&K's history.

We continue to use this cash flow to make investments in our business. We invested $37 million in capital expenditures year-to-date and we continue to expect full-year CapEx around $50 million.

We are also returning more cash to our shareholders. So far this fiscal year, we paid out $22 million in dividends and used another $25 million to repurchase shares. We increased the pace of our stock buybacks during the third quarter when the stock price dipped. In total, cash returned to shareholders through dividends and buybacks is up 60% year-to-date compared to last year.

Our balance sheet is in great shape. Our ratio of debt-to-EBITDA stands at 1.6x and we’ve ample liquidity with over $250 million of cash and undrawn revolver capacity. Our strong cash flow, healthy balance sheet, and value creating capital deployment remains key elements of the G&K's story.

Let me finish with some comments on our outlook. As you’ve seen in our release, we narrowed our guidance ranges as we move into the last quarter of the fiscal year. We now expect full-year revenue of $975 million to $980 million and full-year earnings per share between $3.52 and $3.58.

As we look to the fourth quarter, we expect to drive continued year-over-year margin and ROIC gains from executing our game plan. But softness in some of our end markets will likely continue to temper organic growth.

Thinking about the impact of low energy prices on our business, by the fourth quarter we will have lapped most of the year-over-year benefit from lower fuel prices. But the lost uniform wear that are energy related customers aren’t likely to return in the near-term and we will continue to pressure growth and margin.

Also foreign currency exchange will likely remain a headwind in the fourth quarter. Although the Canadian dollar has rebounded in recent weeks, our guidance assumes currency exchange will reduce fourth quarter revenue by about 1% and reduce EPS by about $0.02 per share compared to last year.

I’d like to remind everyone that our guidance includes the impact of an extra week of operations compared to last year. In our fourth quarter, we will have 14 weeks compared to our normal 13 weeks. This extra week will increase both full-year revenue and EPS by approximately 2% and of course this 2% benefit will be reversed in 2017.

Looking beyond our fourth quarter to next fiscal year, we expect to make further progress toward our 15/5 goals, as we execute our game plan. However, as Doug mentioned, there is a lot of uncertainty in the economy.

If economic conditions remain similar to what we’ve seen in the past few quarters that could push organic growth towards the lower end of the range we’ve been in the past several years. We will provide a more complete guidance for fiscal 2017 on our August earnings call.

In conclusion, we had a strong quarter with good progress towards our 15/5 goals, our cash flow and financial position remain strong and we’re confident that our team and game plan will continue to deliver growth and improved profitability to close out the year.

And with that, we’re ready to take your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And your first question comes from the line of Joe Box.

Joe Box

Hey, good morning everyone.

Doug Milroy

Good morning, Joe.

Joe Box

I just wanted to drill into the updated guidance real quick. I get that you’re baking in the Canadian FX impact, but theoretically the impact should be less relative to your prior guide with the Canadian dollar, now at $0.79 versus $0.71. So I'm just curious if you can maybe put a little bit more color around the decision to tighten the high-end of the range whether there were any changes to that maybe the fundamentals relative to what you’re expecting last quarter, just any color there would be helpful?

Tracy Jokinen

Yes, sure. I’d say overall, Joe, there is not a significant change to our outlook as we narrowed our guidance. But to your point, we do expect to get some relief from FX compared to what we were thinking three months ago. And that relief is really being offset by an expectation that our growth outlook is a little bit more challenging. What remains the same is we continue to expect year-over-year margin improvement and ROIC gains. And so net-net our growth is maybe slightly lower than we had expected a few quarters ago, but it’s still a pretty healthy quarter to finish up the year.

Joe Box

Got it. And then, I guess, on the implied guidance for 4Q, if my math is right here, it looks like something like $31 million of operating income on the low end up to maybe $33 million on the high-end. Just running through the numbers, that splits out an incremental operating margin of about a 11% to 25%. That’s a bit below where it’s been in the last couple of quarters. Is that a function of energy tailwinds starting to abate or would there be anything else kind of in the numbers that theoretically could drag down the incremental margins?

Tracy Jokinen

Yes. I would say that that’s the main driver. As we’ve been talking about, the impacts from energy overall has been somewhat neutral for us where we’ve seen the downside from the lost wears, but the upside on lower energy costs. We are going to start to lap that lower energy costs, but the lost wears will remain in our business. And so we will be dealing with that headwind as we go into our fourth quarter.

Joe Box

Got it. And then, Doug, in light to your commentary on free cash generation, you’re under 1.6 times debt-to-EBITDA now. I think we’re getting closer to the debt levels where you’ve in the past gone out, and you’ve implemented the one-time dividend. I'm curious as we migrate lower here on the leverage ratio, how you're thinking about dividends? Maybe your appetite for potentially putting a little bit more leverage on the balance sheet in light of this uncertain macro backdrop versus just doing more buybacks?

Doug Milroy

You know Joe, as we’ve said in the past that’s a quarter-by-quarter decision. We look at all the various things you just mentioned as well as a number of others and make our decisions. But we’ve settled in on, we really like this approach you’ve seen in the last year almost 18 months of thinking about it as two streams of cash back to shareholders, a nice steady stream of dividends and a healthy stream of repurchases as well. And we like to maintain the flexibility to move either of those. So we’ve said we’ll continue to look at special dividends and the possibility of that and we’ll continue to vary the amount of repurchase that we do. As we look to that dividend stream as a steady stream that will have a long track record of increase and we’ll hope to do again.

Joe Box

Got it. Thanks for the color there. Just one quick follow-up, kudos to you guys in the productivity front and clearly that’s been a long-term driver. Can you maybe put a little bit more color Doug around, what you’re tracking from a productivity standpoint and whether that’s at the plant or that’s at the sales force. And then maybe just talk about the near-term upside potential there?

Doug Milroy

Sure. The step that quoted here and usually talk about is what I would describe as an all in number. You know the third element of our game plan is all around operational excellence. So we believe in tracking productivity closely and monitoring it closely and driving it in a positive way. And as a result not surprisingly, we have a variety of productivity measures you rattled off, you look at sales productivity, you look at productivity in the plant, you look at productivity in the fleet. There’s a number of ways to look at it, but the one I usually talk about with you as a headline metric that’s all in. Now having said that, you asked about the outlook. That number has been a nice steady increasing number for as long as we’ve been at the game plan and we have every expectation that we’ll continue to do that. We think that’s really foundational to our long-term success. You know I’m a trend manager, these things are never or perfectly straight lined, there will be ups and downs, but I have no doubt that the long-term direction of that will be an upward trend and there’s lots of room to go yet.

Unidentified Analyst

Got it. Thank you both.

Operator

Your next question comes from the line of Andy Wittmann.

Andrew Wittmann

Hi, good morning. I wanted to just talk about some of the strategic initiatives that you might have around offsetting some of the headwinds that you’re seeing on the revenue line. In particular it sounds like it seems pretty localized around energy, manufacturing, energy not surprising, manufacturing not I guess surprising either but to a lesser extent. What are you doing to grow the business outside of some of those legacy core businesses and what initiatives you have in place to improve the existing customer penetration?

Doug Milroy

So the answer to the first part of your question is, we’ve talked about the second element of our game plan, it’s all about targeting customers and part of that is ensuring we’re picking the right kinds of customers for the long-term even in what you referred to as legacy segments. But part of that is thinking also about segments and markets that will be more attractive long-term because of the nature of that segment and its growth. So for example you’ve seen our move over the last year 18 months into healthcare would be a good example. And Andy I drew a blank on the other half of your question. Yes, I got it.

Andrew Wittmann

It was end market movement and then penetration or the customer penetration initiatives.

Doug Milroy

Yes, in the penetration I think is among the more exciting things we’ve got going on. We talked last quarter about the introduction of CSRs at our company customer solutions representatives. I said then that it was early days but we liked the feel of what we were doing. A quarter later I can tell you, we like it even more. It just speaks to the underlying strength of the business, the model, the value proposition and our ability to work with customers to identify additional problems that we can solve for them, and then the beautiful part is we get paid for doing that. Its good for our customers and its good for us and it continues to gain traction. So on both those fronts; I think they’ll serve to underpin our growth efforts as we push toward our 5% target.

Andrew Wittmann

Where would you say you are in the rollout of those initiatives? Doug, would you say it’s still kind of early days. I remember when you put the emphasis on the sales force, that wasn’t that long ago and I don’t know when these initiatives started taking more priority. Can you just give us a sense of where we are in that?

Doug Milroy

I think most of them are early days and I answer it that way because we take a multi-year view towards these things. It’s so easy to get caught up in this quarter-to-quarter discussion and [indiscernible] and the oil is a little tough this quarter and that will eventually come around and there will be yet another challenge. I mean that’s kind of what we do. And so, Andy let me back up maybe put a little color on this. We’re always thinking about growth and growth initiatives, and I believe we’ve got a good mix of growth initiatives in place. Some have been in place for a long time and still have legs. So for example, our initial focus on improving our customer service to drive up retention that will underpin anything we’re talking about with growth. So some in place for a long time still have legs. Some I would describe as relatively new, just starting to get some traction, that’s really exciting. So we just talked about the CSR or the big rethink a year 18 months ago in our direct purchase effort. I mean that’s really exciting stuff, you can see it additive to our growth this quarter, that’s still just starting to gain traction. Or I guess I’d give you a third bucket which is we have stuff that’s still on the drawing board. Its not even out there at all, it can't have gained traction. But when we look at some of the things we’ve got planned for the next year 18 months, its those kinds of things that give us so much confidence in achieving all elements of our 15/5 goals.

Andrew Wittmann

Great. That’s really helpful. I like the glimpse that you gave us the view for 2017 talking about, if things are like this and it will be -- the economic performance like it is today and then you could be running at today's growth rates as well. I’m curious as to the, the knock-on effect that you’re seeing from the energy related markets, we have exposure there. Where are we in the collateral damage that might be causing those? And is that one of the growth headwinds that you’re looking at as you move into ’17?

Tracy Jokinen

Yes, it definitely is one of the growth headwinds as we move into ’17, because now we’re into five quarters of continued losses in those areas. So if you know how our business works is that it kind of builds on itself, weekly -- week-over-week, month-over-month, quarter-over-quarter. So as you start to see the slow decline in the revenue it takes the same type of timeframe to bring that revenue back up, and we certainly don’t feel like we found the bottom yet as it relates to our oil and gas customers. We’ve continued to see losses go through our third quarter and we’re expecting to see even more in the fourth quarter as well. So it’s definitely one of the things we think about as a headwind for 2017.

Andrew Wittmann

Okay. I’ll leave it there. Maybe chime in later. Thanks guys.

Operator

Your next question comes from the line of Andrew Steinerman.

Andrew Steinerman

Hi, Tracy. Could you just repeat what you said about organic growth for 2017? I think you said something like; it will be at the low end of the past several years. Just repeat what you said and just give like kind of a timeframe when we should think about it?

Tracy Jokinen

Yes. So what we said about next year is that, we expect to continue to make progress on our 15/5 goals, but given the uncertainty in the economy if things kind of stay where they are at and we continue to have pressure in both the oil and gas markets and with our manufacturing customer base we would expect that our organic growth in 2017 will be at the low end of the range that we’ve been in the past several years.

Andrew Steinerman

And when you say several, do you mean 2014 forward, or are you going back further than 2014 when you say several?

Tracy Jokinen

About 2014 and forward.

Andrew Steinerman

Okay, perfect. Thank you.

Your next question comes from the line of Kevin Steinke.

Kevin Steinke

Good morning. Following up on that line of questioning, it’s a lot of discussion about potentially organic growth being a little bit lower going forward just because of the macro headwinds, and presumably that would also impact the rate of margin expansion as well as it has in fiscal ’16. So, I know you’re not giving guidance at this time, but I guess this macro environment continues then we continue to get a little more backend loaded of the two to four year timeframe for the 15% operating margin. I mean is it the way to think about fiscal ’17 or do you have certain maybe productivity or technology initiatives that might be rolling our next year that will help offset some of that downward pressure perhaps?

Tracy Jokinen

Yes. So we still believe that our 15/5 goals are achievable in the two to four year timeframe that we’ve been talking about. And we’ve said that they’ll likely be backend loaded and clearly now that is our view given what's going on with economic conditions. However we can still make progress in expanding our margins and ROIC, and we expect to do that again next year, and its really coming from three different areas. One is, we have a pipeline of investments and projects that are intended to improve the business, and we’ve talked about making investments both in IT and capacity expansion that will help to drive improvements. We also as Doug has talked about have a culture of continuous improvement in holding our fixed cost fixed and ensuring that where cost don’t directly impact our customer, we’re minimizing those where we can. And then finally that there are pieces leveraged from top line growth. So yes, we’re likely going to need some revenue growth to hit our 15% goals. But we can still make solid gains in this slower growth environment just like we’ve done in the last couple of quarters.

Doug Milroy

Sure, right. Yes, I guess the wildcard there is the leverage from revenue growth, if the revenue growth is a little slower than it has been then you get a little bit less leverage the next year but you obviously have room to improve internally, I guess that’s probably the right way to think about it.

Tracy Jokinen

Yes. And as Doug just talked about, we have a lot of initiatives intended to drive revenue growth back up into the mid single digit range and those things will happen within our two to four year timeframe.

Doug Milroy

Yes. Kevin, this is Doug. Just to add a little color, the way you played it back and you said here kind of out loud that’s probably the right way to think about it, I absolutely think it is. And what I mean by that, the only color I want to add is, while we drive our growth focus, we’ve never relied on that. Our belief is you drive margins and returns and you do it through a lot of different levers. Yes, growth and its leverage was a beautiful one, but there is a lot of other things you can do, that’s been our focus for years and it will remain our focus for years.

Kevin Steinke

Okay, perfect. And in terms of the macro, how much do you think your potential acquisition targets are feeling that and how does -- does that loosen up the environment at all in terms of maybe people are more willing to sell just because the macro is impacting their business. Have you seen any of that or is that not a factor?

Doug Milroy

To the first part of your question, I think that they like we are feeling that. To the second part, I don’t think it changes the M&A landscape much. And you know what, there’s all kinds of reasons it doesn’t, but you get a little bit of, well wait, I don’t want to sell in a downturn. This will come around and I’ll deal with it then. So there’s a number of reasons that I don’t think it changes the landscape but I do believe that the pressure lies across the industry pretty broadly.

Kevin Steinke

Okay. That’s helpful. And then, just lastly can you give the actual energy as a percent of revenue in the quarter and the benefit to operating margin from that year-over-year?

Tracy Jokinen

Yes. In the quarter it was 2.8%. So there was a 70 basis point benefit in the quarter, 3.5% a year ago.

Kevin Steinke

Okay, perfect. Thanks for taking my questions.

Tracy Jokinen

You bet.

Doug Milroy

Thank you, Kevin.

Operator

[Operator Instructions] Your next question comes from the line of Matt Young.

Matt Young

Good morning, guys. Thanks for taking my question. Could you talk a little about the profile of new business growth at this point? And I’m thinking in terms of non-programmers versus market share gains.

Doug Milroy

Yes, in terms of that it’s more at the non-programmer end of the range in which we’ve traded. You’ll recall that range has been 40/60, 60/40 over the years, and the non-programmers are a little more at the upper end of that range.

Matt Young

Okay. And I’m guessing, I mean the market is still fairly fragmented at this point. How do you feel about your opportunity to grab share in the years ahead. I’m assuming some of your initiatives and customer targeting and so forth should be a boost to that.

Doug Milroy

I agree. I remain optimistic and positive on our opportunity to continue to grow through share gains, but also importantly to the heart of your question programmer, non-programmer the opportunity to continue to grow by helping people understand the tremendous value that there is in a unified program. We do a lot for our customers and for their employees for a relatively small sum of money and as people come to understand that, that’s what I think is one of the great growth opportunities in this industry. So you’ll continue to see us work toward a heavy mix of those two kinds of accounts.

Matt Young

Okay, great. That’s all I had. Thanks.

Operator

Your next question is a follow-up from the line of Andy Wittmann.

Andrew Wittmann

Hi, Tracy, I just had a -- another question here on the margin profile that I want to understand. We don’t often hear workers compensation sited, so I want to understand if that was -- was that like an easy comp in terms of the margin profile there or do we have a, maybe a tough comp for next year, and then it just maybe the accounting mechanics around that. If I’m not mistaken, there’s some level of estimation that goes into coming up with your insurance claims liability. I could be wrong with that. But if that is the case, is there a structural change in the way you’re accounting for your workers compensation?

Tracy Jokinen

No. There is no structural change in how we’re accounting for it and it really is based on improvements in our safety performance in driving down the cost of our claims moving forward. So we would expect that there will be some benefit as we continue into next quarter and beyond. Having said that, there was some additional cost last year. So we do have a little bit easier comp in the quarter. But I would say, this is a trend that we can expect to continue to see in workers comp.

Andrew Wittmann

Okay. So, given that can you -- I don’t know if you quantified the exact amount in the quarter. Can you do that and give us a sense if that’s the right or similar rate as we look forward for the next 12 months?

Tracy Jokinen

I didn’t quantify it. It’s about 50 basis points of improvement in the quarter and we’re expecting somewhere around there maybe slightly less going forward.

Andrew Wittmann

Okay. So, that’s material. Thank you. And then I guess final question, Doug. You had other competitors talk about an improving opportunity set for M&A. Are you seeing that, you didn’t mention it too much in the prepared remarks? So it seems like, maybe your suggesting that it’s not quite as important. But I wanted to have you explicitly address that one.

Doug Milroy

M&A stays squarely on our radar as a long-term opportunity. We continue a decent activity level in M&A, but I still -- my view is, it’s a tough market and we’d be ill advised to pin all our hopes and dreams on it.

Andrew Wittmann

Okay, that’s fair. Thank you.

Operator

Your next question is a follow-up from the line of Kevin Steinke.

Kevin Steinke

Hi. Just one quick one. I think you said merchandise amortization expense was higher as a percent of revenue. Can you quantify that?

Tracy Jokinen

Yes, it was 50 basis points in the quarter.

Kevin Steinke

Versus a year ago, right?

Tracy Jokinen

Correct. Yes.

Kevin Steinke

Okay. Thank you very much. That’s all.

Operator

And there are no further questions at this time. I’ll now turn the floor back over to Jeff, for any closing comments.

Doug Milroy

All right. Thank you, Brandy, this is Doug. So closing comments, just thank you all again for taking the time to call in. We’re always happy to have this chance to show our progress with you. We think this team is executing really well in a challenging environment. We have every expectation we’ll continue to do that and we look forward to telling you about that story with our yearend call in August. Have a good day everybody. Thanks.

Operator

Thank you. That does conclude today's conference call. You may now disconnect.

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