Monro Muffler Brake's (MNRO) CEO John Van Heel on Q4 2016 Results - Earnings Call Transcript

| About: Monro Muffler (MNRO)

Monro Muffler Brake, Inc. (NASDAQ:MNRO)

Q4 2016 Earnings Conference Call

May 19, 2016 11:00 ET

Executives

Effie Veres - IR, FTI Consulting

John Van Heel - President and CEO

Cathy D'Amico - CFO

Analysts

Tony Cristello - BB&T Capital Markets

Bret Jordan - Jefferies

Rick Nelson - Stephens

Michael Montani - Evercore ISI

Matthew Fassler - Goldman Sachs

Scott Stember - CL King

Anthony Deem - KeyBanc

Brian Sponheimer - Gabelli

Operator

Good morning, ladies and gentlemen and welcome to the Monro Muffler Brake's Earnings Conference Call for the Fourth Quarter and Fiscal 2016. [Operator Instructions]. And as a reminder, ladies and gentlemen, this conference call is being recorded and may not be reproduced in whole or in part without permission from the company.

I would like to introduce Ms. Effie Veres of FTI Consulting. Please go ahead.

Effie Veres

Thank you. Hello everyone and thank you for joining us on this morning's call. I would just like to remind you that on this morning's call management may reiterate forward-looking statements made in today's release. In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks and uncertainties related to these statements, which are more fully described in the press release and the company's filings with the Securities and Exchange Commission.

These risks and uncertainties include, but are not necessarily limited to, uncertainties affecting retail generally, such as consumer confidence and demand for auto repair; risks relating to leverage and debt service, including sensitivity to fluctuations and 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 publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The inclusion of any statement in this call does not constitute an admission by Monro or any other person that the events or circumstances described in such statements are material.

Joining us on this morning's call from management are John Van Heel, President and Chief Executive Officer; Cathy D'Amico, Chief Financial Officer; and Rob Gross, Executive Chairman.

With these formalities out of the way, I would like to turn the call over to John Van Heel. John, you may begin.

John Van Heel

Thanks, Effie. Good morning and thank you for joining us on today's call. We are pleased that you are with us to discuss our fourth quarter and fiscal 2016 performance. I will start today with a review of our results, our growth strategy and outlook for fiscal 2017, then I will turn the call over to Cathy D'Amico, our Chief Financial Officer, who will provide additional detail on our financial results.

Looking back at our performance through fiscal 2016, we were able to grow sales by $49 million or 5.5% to a total of $944 million. Through our increased scale, effective cost control and the outperformance of acquisition, we delivered 70 basis points in operating margin expansion, and net income growth of 10% versus fiscal 2015, excluding due diligence costs in both periods. We delivered these results despite flat comparable store sales, and on top of the 43% increase in net income we delivered in the prior two years.

Fiscal 2016 earnings per share were $2 compared with $1.88 in the prior year, and included $0.04 of higher due diligence costs. That said, I am disappointed that our overall results were not better. On the plus side, we were able to drive traffic and expand margins. Early in fiscal 2016, we said that we were going to increase traffic, and we did. Despite ongoing weakness in consumer spending and the lack of winter weather in our market, traffic increased by 1% for the year. We also said that we would take advantage of higher average retail prices and lower material costs, to improve margins, and we did. With gross margins up 140 basis points for the year, on top of 100 basis point increase in the prior year. Operating margins were up 70 basis points, as I just described, on top of an 80 basis point increase in the prior year.

Fiscal 2016 was a tale of two periods and two geographies, northern and southern. Through October, despite the difficult consumer spending environment, traffic was positive, comparable store sales were positive, as were brake, alignment, exhaust and tire sales.

Importantly, through October, comparable store sales were positive in both our northern and southern geographies. However, the lack of winter weather that followed, negatively impacted our northern markets, flattening out overall comparable store sales by fiscal year end. While our southern markets delivered positive comparable store sales in the fourth quarter and for the full year.

Our overall sales by category for the year, reflected these dynamics, with outperformance from need-based categories, including alignments, which were up 7%, with consumers looking to extend the life of their tires. Brakes up 2%, as customers address safety concerns, and flat comparable store sales in tires, with higher average realized tire ticket, offsetting a unit decline, driven largely by the lack of winter weather.

Turning to our fourth quarter, comparable store sales increased by 50 basis points. While store traffic for the quarter was up 2%, including positive traffic in February and March combined, we saw consumers defer purchases and focus on the safety of their vehicles, with a 5% increase in comparable store sales for both alignment and brakes, but declines in more discretionary categories, including front-end shops and exhaust, which were down 4% and 8% respectively.

Despite the disappointing sales in the quarter, our focus on margins, cost control and acquisition allowed us to increase our gross margin by 190 basis points and operating margin by 90 basis points, enabling us to achieve $0.42 in earnings per share, the midpoint of our guidance.

Our performance in fiscal 2016 underscores the flexibility of our business model and demonstrates that regardless of the macro environment, we continue to successfully manage the business to deliver improved bottom line results.

As we have discussed on prior calls, consumers continue to be impacted by stagnant wages in the face of increasing healthcare premiums and deductibles, as well as higher rent and other expenses, which outstrip the benefit of lower gas prices. These pressures have caused our customers to continue to defer purchases, and focus on their most critical vehicle needs.

In addition to a weak consumer spending environment, we believe a mild winter has negatively impacted sales in these early spring months, as the lack of extreme cold has resulted in less wear and tear on vehicles and fewer part failures.

As noted in our press release, April and May have started off very slowly, with comparable store sales decreasing 8% for the reasons just described. However, the relative outperformance of our Southern markets has continued with positive comparable store sales in May in these markets. Also, there are potential signs that overall trends maybe starting to turn, as the building block of our business, oil changes, are up 1% so far in May.

The slowdown in sales is impacting our Northern markets and across all category, though tires are performing better than repair-based service category. The weaker quarter-to-date trends we are seeing in our business, are the same trends that competitors in Northern markets we are looking to acquire are experiencing. If this difficult environment persists this fiscal year, I would expect that our acquisitions will be significantly above our 10% annualized growth target.

Turning now to our growth strategy; acquisitions completed in fiscal 2016 represent 35 stores, a total of $36 million or about 4% in annualized sales. These acquisitions allowed us to fill-in our New York, Pennsylvania, Massachusetts and Wisconsin markets. Additionally, the acquisition of Car-X in the first quarter of fiscal 2016, significantly increased our market share in 10 states, through the addition of 134 franchise locations. During fiscal 2016, two new franchise Car-X stores were added and seven Car-X stores were converted to company operated locations.

Fiscal 2016 acquisition growth would have been stronger, had we not shifted our focus for five months to a much larger transaction, which we ultimately did not proceed with.

I am pleased to report that in early May, we completed the acquisition of 29 McGee Auto Service and Tire retail and commercial stores, and one re-tread facility in Florida. These acquired stores are expected to add approximately $50 million in annualized sales, and represent 5% annualized sales growth, achieving half of our full year acquisition growth target already this year. This acquisition represents the sales mix of 40% service and 60% tires and is expected to be breakeven in fiscal 2017. The acquisition allows us to significantly increase our presence in the Greater Tampa Bay and Fort Myers areas, while also expanding into Daytona and Tallahassee.

In just two years since our entry into the Florida market, we now operate 83 stores, extending across both coasts, representing approximately $115 million in annualized sales, or about 12% of total company sales.

Florida and Georgia represents significant opportunities for continued store growth and further diversification of the company's footprint into southern markets. It's worth noting that because we don't have company operated distribution fully servicing Florida and Georgia, we are not achieving all of the synergies we expect to eventually benefit from.

However, as we approach the 100 store benchmark in Florida, we are refining our modeling for distribution to southern markets, and expect to begin laying out plans in the second half of fiscal 2017.

Additionally, I want to note that McGee's business is predominantly retail, about two-thirds, but it includes a larger commercial component than other businesses that we have previously acquired. Margins on commercial service are similar to those in the retail business, and on average, commercial tire sales are gross profit dollars similar to sales of retail tires.

As we look ahead, we plan to grow this component of McGee's business in Florida, as we believe it is complementary to our retail business, and when combined with our overall scale, will lead to significant savings on material costs in that business.

Based on our results in Florida, we will continue to evaluate the many opportunities to expand our commercial business, throughout the remaining 24 states we operate in. Note that, most of the leading commercial dealers also operate some number of retail stores, so we view this opportunity as not only important, but a natural extension of our proven, retail-focused consolidation strategy. We believe solid execution of our strategy will continue to expand our sales, market share, and overall profitability for many years to come.

Our confidence in our fiscal 2017 acquisition opportunities is underscored by the more than 10 NDAs we currently have signed, the same level as last quarter, despite having completed yet another transaction with the McGee deal. Each of these NDAs represent between five and 40 locations, all within existing markets.

Additionally, the new $600 million expanded revolving credit facility we completed in January 2016, more than doubles our previous borrowing capacity, and allows us to increase the number and size of acquisitions we can pursue going forward.

In some ways, the start of fiscal 2017 is déjà vu, as its similar to the beginning of fiscal 2013, in which we experienced one, a slow start to the year, with weak consumer spending and unseasonable weather impacting sales across categories in northern markets. Two, $50 million in annualized acquisition growth completed early in the fiscal year. And three, a strong acquisition pipeline, driven primarily by the fact that owners of independent tire dealers are at or near retirement age, without an internal succession option. Both years are also characterized by the potential for tax and capital gains increases in the following calendar year, which may accelerate current year acquisition.

In fiscal 2013, that was predominantly calendar 2012, it was capital gains tax increases, and this year, it's the Presidential election, that most likely results in higher taxes, no matter who gets elected.

The net results of fiscal 2013, was lower comparable store sales and compressed margins due to higher material costs, but importantly, fiscal 2013 delivered 25% in annualized sales growth through acquisitions, that has [indiscernible] over 50% increase in earnings over the last three years.

There are also some important differences between fiscal year 2013 and 2017. One, we are a much larger company now, with exposure to southern markets. Two, we believe we are now late in an elevated consumer deferral cycle, and total vehicles in operation are growing, and three, we have a credit facility more than double what it was four years ago. And most importantly, material costs are expected to decline this year, which provides some offset against any continuing sales pressure.

As I said earlier, I already expect fiscal 2017 to be a good year for acquisitions, versus our annual target of 10% annualized sales growth. However, it may set up to significantly leverage the great hedge in our business. The ability to grow the business at an accelerated pace during difficult markets.

In light of what we accomplished during fiscal 2013, I will take a difficult year, which means we have the opportunity to expand our business by anywhere near 25%, through attractively priced acquisition.

Additionally, you can expect to see us increase the number of greenfield stores we open this year. We are targeting 20 to 40 greenfield locations in fiscal 2017, with eight stores expected to open in the first four months of this year. The majority of these stores will be fill-in purchases of existing one to three store businesses in our existing markets. Overall, we should see lower entry costs and higher returns, as we bring significant operating margin improvements to these locations. We expect each of these stores will average $1 million in annualized sales, and will not be included in our guidance, until they open, so they represent some potential upside to our full year estimate.

Now, I'd like to turn to our outlook. Given the continued choppiness in the market, we are guiding comparable store sales to a decrease of 5% to 8% and total sales in the range of $230 million to $240 million in the first quarter. We anticipate first quarter diluted earnings per share to be between $0.47 and $0.51 compared to $0.57 for the first quarter of fiscal 2016.

At the midpoint of our guidance, operating margin is expected to decrease by approximately 150 basis points, driven by deleveraging from negative comparable store sales. We expect sales to improve, as the year progresses, particularly as we move past spring and into the summer driving season, and as we lap easier weather and sales comparison in the second half of the year. We also believe there may be some benefit in consumer spending in the second half of the calendar year, as consumers need healthcare deductible.

For fiscal 2017, taking into account the full year of sales from our 2016 acquisition and 11 months from our most recent 2017 acquisition, we anticipate total sales to be in the range of $980 million to $1.010 billion based on comparable store sales guidance of flat to a 2% decline. This guidance assumes that the second quarter comparable store sales are down about half of the first quarter decline, and that sales in the second half of the year turn positive, with more normalized weather in our market.

We continue to expect that Monro's overall tire costs, including related warehouse and logistics will be down slightly as a percentage of sales in fiscal 2017. In fact, we believe we will widen our competitive cost advantage even further, as market dynamics have become increasingly difficult for smaller dealers.

As we told you on previous calls, we have shifted the vast majority of our non-branded tire sourcing through suppliers outside of China, minimizing the impact of the Chinese tariff.

Because of lower material costs we anticipate in fiscal 207, we expect to generate operating leverage on comparable store sales above flat this year. I would also like to remind you that, every 1% increase in comparable store sales, generates an incremental $0.07 in EPS for the year. Based on these assumptions, we expect fiscal 2017 earnings per share to be in the range of $2.05 to $2.20. This includes $0.14 to $0.16 in contribution from recent acquisitions, and is based on 33.4 million diluted weighted average shares outstanding. The low end of our fiscal 2017 guidance, reflects the $2 in EPS in 2016, adding back the non-recurring $0.04 of higher fiscal 2016 due diligence costs, and adding $0.15 from recent acquisition. This is offset by the $0.14 impact from a 2% decline in comparable store sales. At the midpoint of our guidance, operating margins are expected to increase by approximately 30 basis points and EBITDA is expected to be $170 million.

Turning now to the long term drivers of our business. The structural trends in our industry remain positive, and we expected them to strengthen as we move forward. For the first time, vehicles 13 years old and older, accounted for 26% of our traffic in fiscal 2016. These vehicles produce average tickets similar to our overall average, which demonstrate that consumers continue to invest in and maintain their vehicles, even as they age.

Additionally, as we look over the next five years, we will see an increasing number of vehicles entering our sweet spot of six years old and older, driven by the strong recovery in new car sales in 2011 through 2015, representing a significant tailwind for our business.

Overall, while we expect a difficult environment in the first half of fiscal 2017, we remain confident in the long term outlook for the industry. Some will interpret the recent slowdown in sales in our industry, as the start of a secular trend. If you think the world has changed since last October, when we were positive in traffic, comp store sales, margins and earnings, let me state very clearly, that I don't agree.

As I commented earlier, I am disappointed that our results for fiscal 2016 were not better. However, we were able to drive traffic and expand margins in a difficult operating environment. Our team continues to demonstrate the importance of our acquisition strategy and our ability to effectively execute, as proven by the strong contributions from our recent acquisition, and the completion of our most recent transaction. I expect a solid year for acquisitions in fiscal 2017, which may turn into a very significant year, if market dynamics do not improve or if tax increases become more likely.

Before I turn the call over to Cathy for a more detailed review of our financial results, I would like to thank all of our employees for their continued hard work, passion for superior customer service, and consistent execution, all of which are critical to Monro's brand strength and financial success. We greatly appreciate their efforts.

Now, I'd like to turn the call over to Cathy. Cathy?

Cathy D'Amico

Thanks John and good morning everybody. Sales for the quarter increased 4.5% and $9.9 million. New stores, which we define as stores opened or acquired after March 29, 2014, added $11.1 million, including sales of $9.9 million from fiscal 2015 and 2016 acquired stores. Comparable store sales increased 0.5%, and there was a decrease in sales from closed stores of approximately $3.1 million, largely related to the BJ store closures in fiscal 2015.

There were 91 selling days in both the current and prior year fourth quarters. Year-to-date, sales increased $49.2 million and 5.5%. New stores contributed $68.7 million of the increase, including $63.6 million from fiscal 2015 and 2016 acquisitions. This was partially offset by a decrease in comparable store sales of one-tenth of a percent, and sales from closed stores of approximately $19.6 million, again, largely due to the 2015 BJ store closures.

There were 361 selling days, in this and the last fiscal year. At March 26, 2016, the company had 1,029 company operated stores at 135 franchise locations, as compared with 999 company operated stores and one franchise location at March 28, 2015.

During the quarter ended March 2016, the company added six company operated stores and closed eight. For the full year 2016, we added 52 company operated stores. Including seven acquired from Car-X franchisees, and we closed 22 underperforming locations, generally at the end of their lease terms.

With regard to franchise locations, we added one during the fourth quarter of this year and four closed. During the year, we added two franchise locations and seven closed, in addition to the locations we acquired from Car-X. Additionally, we purchased seven locations during the year from existing franchisees.

Gross profit for the quarter ended March 2016 was $91.9 million or 40.1% of sales, as compared with $83.7 million or 38.2% of sales for the quarter ended March 2015. The increase in gross profit for the quarter ended March 2016, as a percentage of sales, is due primarily to a decrease in material costs as compared to the prior year. Total material costs, including outside purchases, decreased as a percentage of sales as compared to the prior year, largely due to a decrease in oil and tire costs.

Gross profit for the fiscal year ended March 2016, was $385.7 million or 40.9% of sales, and it’s compared with $353.3 million or 39.5% of sales for the fiscal year ended March 2015. The full year increase in gross profit, as a percentage of sales, is largely due to decreased material costs as previously described. Distribution and occupancy, as well as labor costs were relatively flat, as a percentage of sales, as compared to the prior year. Labor productivity, as measured by sales per man hour, improved over the prior for both the fourth quarter and fiscal year 2015.

Moving on to operating expenses, for the quarter ended March 2016, they increased $5.3 million and were $65.4 million or 28.6% of sales, as compared with $60.2 million or 27.5% of sales for the quarter ended March 2015. The dollar increase in operating expenses, is largely due to new stores, and higher net costs related to store closures.

As a percentage of sales, about half of the increase is due to the increase of store closing costs, with the remainder related to deleverage, resulting from the increase in total operating expenses against softer sales increases.

For the fiscal year ended March 2016, operating expenses increased by $21.6 million to $265.1 million or 28.1% of sales, as compared with $243.6 million and 27.2% of sales, for the prior period. Excluding the increase in due diligence costs in fiscal 2016 and operating expenses associated with fiscal 2015 and 2016 acquired stores, operating expenses increased only $2.7 million or approximately 1% over the prior year. As a percentage of sales, the increase is largely due to increased expenses against relatively flat comparable store sales.

Operating income for the quarter ended March 2016 of $26.5 million increased 12.6% as compared to operating income of approximately $23.5 million for the quarter ended March 2015, and it increased as a percentage of sales, from 10.7% to 11.6%.

Operating income for the full fiscal year ended March 2016 of approximately $120.5 million increased by 9.8% as compared to operating income of approximately $109.8 million for the fiscal year ended March 2015, and increased as a percentage of sales from 12.3% to 12.8%.

Net interest expense for the quarter ended March 2015 at 2% of sales, increased $1 million as compared to the same period last year, which was at 1.6% of sales. Weighted average debt outstanding for the fourth quarter of fiscal 2016, increased by approximately $13 million as compared to the fourth quarter of last year. The increase is due to an increase in capital lease debt recorded, primarily, in connection with the fiscal 2015 and 2016 acquisitions, partially offset by lower borrowings on our revolving facility. The weighted average interest rate also increased by approximately 120 basis points from the prior year, again, largely due to adding capital leases.

For the fiscal year ended March 2016, interest expense increased by $4.2 million, and increased from 1.3% to 1.6%, as a percentage of sales for the same period. Weighted average debt increased by approximately $41 million, and the weighted average interest rate increased by approximately 80 basis points. Again, largely due to an increase in capital lease debt, as well as an increase in the LIBOR and primary versus last year.

The effective tax rate was 36.5% of pre-tax income for the quarter ended March 2016, and 37.5% for the quarter ended March 2015. For the year ended March 2016, the effective tax rate was 36.6% of pre-tax income versus 37.8% for the year ended March 2015. The decrease in the effective income tax rate for the year ended March 2016, is primarily due to a tax benefit that was recorded for the reduction in reserves, related to the refinement of transfer pricing estimate, as well as normal year end FIN 48 adjustment.

Net income for the current quarter of $13.9 million increased 10.8% as compared to the quarter ended March 2015. Earnings per share on a dilutive basis is $0.42, increased 10.5% as compared to last year's $0.38. For the full fiscal year March 2016, net income of $66.8 million increased 8.1% and diluted earnings per share increased 6.4% from $1.88 to $2.

Our balance sheet continues to be very strong. Our current ratio of one to one is comparable to year end fiscal 2015. Inventory at March 2016 was relatively flat with the balance of March 2015 with inventory turns up slightly from fiscal 2015. During this fiscal year, we generated approximately $127 million of cash flow from operating activities, and decreased our debt under our revolver by approximately $19 million. We used cash flow from operating activities to finance our fiscal 2016 acquisition, which added 40 stores as well as the Car-X franchise business.

Capital lease and financing obligations increased $35 million, primarily due to the accounting for our fiscal 2015 and 2016 acquired stores. At the end of the fiscal year, debt consisted of $103 million of outstanding revolver debt, and $177 million of capital leases and financing obligations. Our debt-to-capital ratio, including capital leases, is 34% at March 2016, as compared to 36% at March 2015. Without capital and financing leases, our debt-to-capital was 16% at the end of March 2016 and 21% at the end of March 2015.

Under our new revolving credit facility that we signed in January 2016, we have $600 million that is committed through January 2021. Additionally, we have $100 million accordion feature included in the revolving credit agreement. We are currently borrowing at LIBOR plus 100 basis points, and we have approximately $430 million of availability, not counting the accordion. We are fully compliant with all of our debt covenant, and we have plenty of room under our financial covenants to add additional debt for new acquisitions without any problems. All of this, as well as the flexibility built into our debt agreement, allows us to take advantage of more and larger acquisitions, and makes it easy for us to get acquisitions done quickly.

During this fiscal year, we spent approximately $37 million on CapEx, which included 12 single store purchases in Greenfield locations and $49 million on acquisition. Depreciation and amortization totaled approximately $40 million and we received $9 million from the exercise of stock options. We paid about $20 million in dividends.

So reiterating the guidance for fiscal 2017 and expanding on it a little bit, as John stated, we expect sales in the range of $980 million and $1.01 billion. This reflects the decline in comparable store sales of 2% to flat comparable store sales, as compared to fiscal 2016. Operating margin is expected to increase by approximately 30 basis points at the midpoint of our range. Interest expense should be about $15 million before any adjustments to true-up acquisition accounting for potential capital leases. However, any such adjustment would result in a reduction to occupancy costs and cost of sales.

EBITDA should be approximately $170 million, at the midpoint of our range. Depreciation and amortization should be about $40 million. CapEx could be as high as $46 million, with maintenance CapEx at about $26 million and the remainder for new stores. The tax rate should be about 37.4% for the year, with some fluctuations between quarters.

I also wanted to take just a minute at this point, to mention the [indiscernible] change, which most of you are familiar with, which is raising the minimum weekly wage for salaried individuals from $455 per week to $913 per week, beginning in December 1 of this year. We are looking at our pay plan and will make the necessary changes to comply with the law, with minimal impact on the overall payroll expense for the year. So this has been incorporated in our numbers for fiscal 2017.

That concludes my formal remarks on the financial statement, and with that, I will turn the call over to the operator for questions. Operator?

Question-and-Answer Session

Operator

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

Tony Cristello

Hi. Thank you. Good morning everybody.

John Van Heel

Good morning.

Cathy D'Amico

Good morning.

Tony Cristello

First question I had, with respect to, just sort of the distribution center and potential addition for Florida, and what type of leverage that ultimately can bring, as you grow that business? It's obviously not giving us the benefits that you can fully realize in a self-distributed marketplace?

John Van Heel

My expectation is, it's going to be somewhere in the neighborhood of 200 basis points.

Tony Cristello

And what's the timeline that -- if you start implementing something, I think you talked about, perhaps a second half of next year, what's the timeline of then getting something fully up and running? Is that a 12 months sort of project to get something going?

John Van Heel

Yeah, I think. We'd expect something to be occurring within some time mid fiscal 2018.

Tony Cristello

Okay. And then I guess, I wanted to ask a little bit, I missed the final CapEx number, Cathy, that you gave, so I wanted to -- I got $26 million of maintenance CapEx and I missed the other component there. But I also wanted to understand, if I look at what you have done and relative to a store investment standpoint, you have got over 1,000 locations now. And as you start to add more, and if you accelerate -- are your stores where they need to be, whether its systems or equipment or tooling or Wi-Fi or whatever else it might be? I mean, should we have to expect any change in how you view maintenance CapEx in a more normalized environment?

Cathy D'Amico

Tony, what I said for 2017 was that we thought CapEx could be upwards of $46 million. Maintenance CapEx would be about $26 million and the other $20 million would be for opportunities that see with single store acquisitions that John has talked about in the past.

As far as our stores are concerned, we don't expect any -- we have been performing routine CapEx and investing in our stores, in equipment that's needed, we are up with the latest technology. This year, we are going to have Internet in all of our stores. So that's all included in our numbers, and I don't see any year coming, that will have a [sight] [ph] in there, in terms of maintenance CapEx. John, I don't know if you want to comment?

John Van Heel

I would agree.

Tony Cristello

Okay. And then, one last question, just on your purchasing cost; is there any reason to believe, I mean how should we think about from a commodity standpoint. Is there any read through, if oil prices stay here or go up a little bit? Do you still think the capacity that you see coming into the marketplace is still going to give you some benefit, in terms of your purchasing as we move forward?

John Van Heel

Yes. Our guidance is contemplating commodity prices around where we are right now, and so, that's all incorporated in what we put out for this year. So yes we are still expecting these benefits with commodities where they are at.

Tony Cristello

Great. Thank you for your time.

John Van Heel

Sure. Thank you.

Operator

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

Bret Jordan

Hey, good morning.

John Van Heel

Good morning.

Bret Jordan

When you look at the comp guide, could you sort of give us some granularity between what you are expecting in price and traffic? I guess, both in the quarter, that we are looking at now, and then for the year?

John Van Heel

Sure. For the quarter, traffic is down right now. So I am expecting that traffic in either scenario is down. The minus 5 contemplates us running basically flat in June, and then as we’ve said for the remainder of the fiscal year, Q2 is about half of the decrease in -- what we put out for Q1, so it's down two to four. And then the back half of the year is up one to four. One gets us back what we lost last year, and I would expect, from a traffic standpoint, we are going to be positive in traffic as we -- later in the year, as the business responds to the soft winter compares that we have.

In pricing, right now we are seeing a little bit of price pressure, which says to me that others are feeling very much the same trends that we are. So that's baked into, a little bit of price pressure is baked into the first quarter estimate with that, easing up as we go through the year.

Bret Jordan

Okay. And then on McGee, with the commercial mix, is that something that you are going to begin to look at commercial acquisitions in the rest of your geography as well, since your toe is in the water in Florida, are you going to shop around in the northern markets as well?

John Van Heel

What I said in my comments was that, we are going to focus on Florida first. We are going to prove the value that we bring to that business down there, and there is a significant opportunity down there. And then we will look outside of that, so I think, we are open to anything that, obviously that makes sense, and we think that adding commercial and going after it in Florida first, is the smart way to do that, and then absolutely, it could represent a significant opportunity outside of Florida, because its complementary to the business overall.

Bret Jordan

Okay. And then last question; on store closures, is there any common theme? Are you either in the region or some of the store closures that we saw at the end of the year, from a particular acquisition?

John Van Heel

No. Those are throughout our markets. There is no real concentration there to tap in that, a number of leases came up this year that we decided that were underperforming stores and we are at the end of the lease, so we took advantage to clean those up.

Bret Jordan

Okay, great. Thanks.

John Van Heel

Thank you.

Operator

And we will take our next question from Rick Nelson with Stephens.

Rick Nelson

Good morning. John, I think you had 25% acquisition pace in 2013. If we added together the 10 [NDAs] [ph], what would that represent in terms of growth for you, if you got them all?

John Van Heel

Yeah, like I have said in the past that represents at least two years of acquisition growth. So it's in the neighborhood of 20% plus.

Rick Nelson

And what are you seeing in terms of acquisition multiples? I guess, McGee would be the most recent example, any changes there?

John Van Heel

No changes in what we have seen on deals in that size. Our metrics are holding.

Rick Nelson

Got it.

John Van Heel

Of course, it's a tough year this year and earnings go down for, you know, for the guys that were looking to buy. At that point, we adjust our purchase price in our expectations based on those multiples. And I think that for us, with the operating leverage that we bring; absolutely you know, is a much higher value for us.

Rick Nelson

And are you starting to see or more willing -- more negotiations I guess and more willing sellers?

John Van Heel

Yes. A tough market helps those conversations, as does fear of tax increases. These guys are going to sell their business only once in their life, and the last thing they want to do is write a bigger check for the pleasure of having sold it.

Rick Nelson

Scale about competitive landscape, the franchise dealers into the -- making a big push into the tire business, the internet companies, like Tire Rack, are you seeing any meaningful changes, that way they could be affecting comps?

John Van Heel

Nothing year-over-year, no. The installations that we do for Internet-based companies are a couple of percent. Our tire units have been -- I don't see that as the issue and you with regards to franchise companies that right now don't have a large presence in the tire -- on the tire category. I mean, I am not overly concerned about those guys. The folks that we have in our stores are well-trained and we had your great programs that I think is very hard to replicate, including availability of tires, which of course is helped by the fact that we focused on store density and you'll find that a lot of these franchise guys don't have the capacity to carry tires make it convenient for consumers.

Rick Nelson

And then, tire unit decline you referred to in the fourth quarter percentage I guess was that, and if you could comment on market share, what you think happened there, as well as what you are seeing in the April-May timeframe, from a unit perspective and a market share perspective?

John Van Heel

Units were down 3% in quarter and tire ticket was up by some -- in April. In May units are down. And as I said, from a market share perspective, we are absolutely not losing share from everything that I gather, through looking at financials or you know for companies that were looking to buy, we are absolutely performing with the market and better than that.

Rick Nelson

Thanks for the color and good luck.

John Van Heel

Sure. Thank you.

Operator

And our next question comes from Michael Montani with Evercore ISI.

Michael Montani

Hey guys. Thanks for taking the question. Just wanted to ask, if I could first off; what the split was by mix of business, just what percentage of revenues you have for brake, service maintenance, etcetera?

John Van Heel

Sure. For the quarter, it was 13% brakes, 3% exhausts, 10% steering, 45% tires, and maintenance was 29%.

Michael Montani

Okay. And then, within that I guess, just diving into the tire ASP a little bit more, can you provide any update, what percentage was the imported tires of your total tire units and then also, are you still feeling any trade down pressures there or what about pricing -- what kind of price increases are you getting on that?

John Van Heel

So the imports are just under 40% of the overall mix. So that's down a little bit and from a average selling price perspective, we picked up you know price as we had consistently throughout the year.

Michael Montani

Okay. And I guess, the follow-up I had was just on the labor side; can you share any kind of updates in terms of what you're seeing for wage increases for your technicians, either on an hourly rate or otherwise? And what is your ability to pass it through; because there's some nice gross margin gains, but it sounds like it's really -- mostly occupancy as well as some of the acquisition cost improvement, given commodity costs?

John Van Heel

Yeah. Its pricing discipline combined with material cost reduction, in terms of the gross margin improvement. From a labor perspective, we managed labor well this year, I think. Our labor as a percentage of sales was flat. So we've been competitive in terms of wages and anything we've had to do has certainly been made up for in productivity. But our rate base is generally pretty flat.

Michael Montani

How much is retention for the technician themselves; because there has been a fair amount of interest from the dealers to kind of poach these guys, not just from you all, but broadly. Are you seeing any of that or are you feeling like there's good recruitment?

John Van Heel

Sure. We have been seeing that for -- I have been in this business for more than 13 years, we have seen it for that entire time. If you're asking whether anything has changed fundamentally there, I would say no.

Michael Montani

Okay. Thank you.

John Van Heel

Thank you.

Operator

And we will take our next question from Matthew Fassler with Goldman Sachs.

Matthew Fassler

Thanks a lot. A couple of questions if I could. First of all, at a couple of conference presentations you all had over the course of the quarter, you indicated that that the pace at which you finish the quarter and started fiscal Q1, you felt it was likely to be the pace at which you would you would run for a few months going forward? You sort of saw this indicative of what the run rate would look like? It seems like, despite the tough start to Q1, you seem to think, perhaps because of what's happened in recent days or perhaps because of some obvious weather factors, that some improvement is likely reasonably soon. So if you could just help us contextualize how you're thinking about the forecast, [indiscernible]?

John Van Heel

I think you summarized what we're considering. First of all, the trend significantly changed, almost immediately in April. And so, if you want to say that, we underestimated what that would look like, I think that's a fair statement. I just don't -- we are a needs based business and you know what I really see here, is a pull back by the consumer, off of a very light winter. And I think what gives me confidence about that, is the fact that our southern markets are better, and the fact that, later in the year, we really have easier comps and that's really what -- there is something going on with the consumer that wasn't present at the time we were having those discussions at conferences, and I think that for those reasons, it's going to improve as we work through the year.

Matthew Fassler

Got it. If I and this might be kind of a common old tad issue, and I am new to covering the stock as you know, but if I look now, there is obviously some quarter volatility on whether and other things. If I look now, really in the past four or five fiscal years, we've been running comps flat to down somewhat and that's in contrast to, where we stood with some consistency over the prior number of years. Where flat, has been, in essence, the low end of the range and that was through a variety of macroeconomic backdrops. If you could think about something structural that you think would get you back to the prior comp range or maybe it has to do with acquisition volume and integration, just what do you think it would take to get the comps out of the rut, that we've seen, and what would have to happen in the industry for that to transpire?

John Van Heel

First of all, I think if you look back at that period, you will see over the last several years that our comps have been down 50 basis points, I think, from 2014. If you go back a few years earlier than that, just to give some perspective, we ran three years at plus 7 -- prior to this sort of tougher period, and what I referred to in the comments are that, I know that there are more vehicles that are entering the six plus age range over the next five years and we really haven't had that. It has been more flat. Overall vehicles in operation have been flat and now that's coming back and growing.

The other important trends, older cars is a trend that's going to continue for the next several years. I think you know that helps. And you are seeing that there are more vehicles per base, so the service station and garages are exiting the marketplace. So when you look at overall vehicles in operation increasing 8% over the next five years, you look at the number of vehicles coming into six plus going to be increasing for the next five years and you look at the number of vehicles per day continuing to go up, because small guys are exiting the market. I think that underpins what we've described as our opportunity on the traffic side. And then we are proving that we've been able to get something in price.

If you look at something like flat to plus two in traffic and flat to plus two in price, you get that 3% comp that we talked about.

Matthew Fassler

Thanks so much John. Appreciate it.

John Van Heel

Sure. Thank you.

Operator

And our next question comes from Scott Stember with CL King.

Scott Stember

Good morning.

John Van Heel

Good morning.

Scott Stember

Could you may be talk about the cadence of sales by month in the quarter please?

John Van Heel

Sure. January was up 10, February was down 4 and March was down 3.

Scott Stember

Okay. And maybe just bigger picture, not having a crystal ball and knowing what sales will be, obviously it's a very volatile market and you said yourself, this is a needs-based business. In the event that sales were to be worse than expected than the guidance than you gave, and we were to some of these pretty sharp negative trends continue for the foreseeable future. Does this, at any way, impact your acquisition strategy whatsoever and maybe also just throwing the balance sheet in there as well, given the fact that you have been using debt to some extent to fund these acquisitions? Thanks.

John Van Heel

Sure thanks. As I said in my comments, if this is year's fees stays very difficult, we will get significantly more than our average annual 10% target of acquisitions done. That's my expectation, and the fact that we have $400 million plus of availability, means that we can get pretty much any the acquisitions that that we have as NDAs done as a part of that and that I -- it's the thing that I have -- that's attractive to me, or being one of the most attractive things about me to Monro, over the years and that continues to be. It's great hedging our business.

Cathy D'Amico

Even in a softer year, we are generating $80 million to $90 million of free cash flow.

John Van Heel

Yeah. Fair point. Absolutely.

Scott Stember

Got you. And just last question, just trying to flush out the 8% decline that we have seen so far. Without getting, maybe too specific by category, but could you just talk maybe how tires are performing versus some of the other categories? Just better core spend --?

John Van Heel

Sure. As I said, tires are actually performing better than our other care-based service categories.

Scott Stember

Okay. Got you. All right. That's all I have right now. Thanks for taking my questions.

Cathy D'Amico

Thank you.

Operator

And we'll take our next question from Anthony Deem with KeyBanc.

Anthony Deem

Hi, John, Cathy, Rob Effie, good morning. Thanks for taking my question.

Cathy D'Amico

Good morning.

Anthony Deem

I have a three part question here on the comp outlook, kind of going off one of the last question. And John, I appreciate the vehicle part in each comment. For 2017, its going to mark the fifth year of flat to negative same store sales, but while the [indiscernible] is not up. So would your company ever roll out you evaluating the positive longer term same store revenue growth outlook? And then, as it relates to the 2017 comp outlook, it sounds like the first quarter, you are not losing share, but taking a step backing, thinking more longer term, do you think this is a regional issue and sort of a weak consumer? Monro losing share over the long term and then there is one more on there; lastly, how should we think about the margin, given the weak comps? As we think there is the need to be more competitive, maybe the exact price of profitability, because frankly it's not like -- that's exactly what's going on in the first quarter? Thank you.

John Van Heel

Sure. I described what my view is of our comp outlook going forward, and I guess I wouldn't change that. I would only change that, if I saw one of those fundamental pieces of it, change itself. So from the second piece I think was, in the first quarter -- is it regional, and I think we expressed very clearly that our southern market has been and are performing better and we have actually seen that as well in the financials of the acquisition that we have been looking at. So yes, I do think its regional, and I think that's an important element to it.

And then lastly, in terms of pricing and -- pricing versus volume and traffic, we are a retailer, we are always focused on traffic, but as we said in the past, we are focused on bottom line profitability and we try to manage the business in that way. We need to stay competitive generally, but we are not the lowest price guy out there, and I really -- I don't see that changing right now, that doesn't mean we don't have to modify our pricing and react, like I did talk about. We have seen some pressure in these first several weeks of the quarter, on pricing. But again, we manage the business for the bottom line, and trying to balance that with driving traffic and sales.

Anthony Deem

Okay. And in your flat to down 2% comp estimate for the year, can you break down the full year assumption on prior revenue and unit specifically and then the expectation for services? I may have missed that, I am not sure [indiscernible], but I'd appreciate that. And then, on the price pressure in the first quarter, some more on the tire side and the service side, because it sounds like the fourth quarter tire ASP is about 5%, which is pretty aggressive. Thanks.

John Van Heel

Sure. I would expect tire -- tire units right now are under pressure, as you would imagine, but that's being down. And I would expect tire units to be positive in the back half of the year. Like I said, tire units were down for the year, so I think, you can expect us to look to get a big chunk of that, back during the year. And then the second part of your question, what was that?

Anthony Deem

Yeah. Just on the tire pricing pressure in the first quarter, it has been on service or tires across the board? The fourth quarter tire ASP is strong, to my point, I think that tire price --

John Van Heel

That is not all ASP, there are some other related services like TPMS that was doing a good job in there. But we did select more on tires during the quarter.

Anthony Deem

Can I sneak one more in please, John, to your comment on leverage that says, now it's a flat comp, where it's sort of -- the leverage is dilutive or I guess is it 0.5% so [indiscernible] inflation?

John Van Heel

We said that, we will start to achieve operating leverage on any positive comps. So if you want to call it an inflation hurdle, inflation hurdle is zero.

Anthony Deem

Thank you very much.

John Van Heel

Sure.

Operator

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

Brian Sponheimer

Hi, good morning everyone. It’s Brian Sponheimer on for Carolina. Thank you for letting me in. I guess just one question, because I know you are bumping up against time here; the transaction that you weren't able to compete last year, has there been any noticeable difference in how they go to market, in your comparable markets, and has that changed the environment at all from a pricing perspective?

John Van Heel

I assume you are talking about capital lease?

Brian Sponheimer

Yes.

John Van Heel

No, I don't think they are driving the market.

Brian Sponheimer

All right. And then I guess one just real quick; John, when you speak about the consumer environment, you probably use that same term as difficult for the last several years, you and Rob. Is this environment any different really than that, which you have really been experienced in the past seven, eight, nine, 10 years? What other than wage inflation would lead you to change your view on that?

John Van Heel

I think it is a difficult environment. It has been a difficult environment for some time, and I think, some wage inflation would certainly help that. But the consumer overall, is dealing with the higher cost that I talked about, and I do think that healthcare, rent, those kind of things are outstripping the benefit of GAAP. I mean, we look at our own employees and we look at our customers and we see a lot of similarities -- I think that's a -- we have seen it over the couple of years in trade-down and in increasing [indiscernible] and deferrals and that's the environment that we are describing, and that we have been operating through, and again, the tougher the environment, the more we will grow the top line, and that to me is the big hedge for you in the business that we have, that we continue to act at.

Brian Sponheimer

All right. I really appreciate it. Thank you very much.

John Van Heel

Sure.

Operator

And at this time, I'd like to turn things back to Mr. John Van Heel for any closing or additional remarks.

John Van Heel

Thank you. Thank you all for your time this morning. We remain focused on managing the business through this difficult environment and taking advantage of the significant growth opportunity it presents. I look forward to reporting our progress in July, and as always, we appreciate continued support, in the effort of our employees that work hard to take care of our customers every day. Thanks again and have a great day.

Operator

And that does conclude our conference. Thank you for your participation. You may now disconnect.

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