Monro, Inc.
Q4 2015 Earnings Call Transcript

Published: 21 May 2015

[Operator:]

Good morning ladies and gentlemen, and welcome to the Monro Muffler Brake’s Earnings Conference Call for the Fourth Quarter of Fiscal 2015. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [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’d now 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’d 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’d like to call your attention to the risks and uncertainties related to these statements, which are more fully described in the press release and the Company’s filings with the Securities and Exchange Commission. These risks and uncertainties include, but are not necessarily limited to uncertainties affecting retail generally such as consumer confidence and demand for auto repair, risks relating to leverage and debt service, including sensitivity to fluctuations in interest rates, dependence on and competition within the primary markets in which the Company’s stores are located and the need for and costs associated with store renovations and other capital expenditures. The Company undertakes no obligation to release publicly any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The inclusion of any statement in this call does not constitute an admission by Monro or any other person that the events or circumstances described in such statements are material. Joining us for 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’d like to turn the call over to John van Hell. 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’re with us to discuss our fourth quarter and fiscal 2015 performance. I’ll start today with a review of our results, key initiatives and outlook for fiscal 2016. I'll then turn the call over to Cathy D’Amico, our Chief Financial Officer who will provide additional details on our financial results. Looking back at our performance in fiscal 2015, we were able to grow sales by $63 million or 8% to a total of $894 million. Through our increased sale and effective cost control, we delivered 80 basis points in operating margin expansion, resulting in earnings per share growth of 13% on top of 27% growth in fiscal 2014. Before I go on, I want to take a few minutes to tell you that while we have expanded our operating margin and increased earnings and the bottom line remains more important than the topline, I’ve been frustrated by our inability to combine this with higher comparable store sales, especially in light of the 2% increase in comparable store oil changes over the past few years. I’m tired of being cautiously optimistic about the consumer and talking about deferrals, tire deflation and the weather. As a result, we have recently taken significant steps to profitably grow traffic and sales. These include rationalizing our field management structure as well as strengthening and adding resources through recruiting employee training and marketing. Additionally, we are aggressively moving to further integrate digital technology into our customer value proposition, specifically into Monro’s customer interaction, feedback and marketing activity. These initiatives are being implemented this quarter and next and I expect them to positively impact traffic and sales this fiscal year. They include

[Cathy D'Amico:]

Thanks, John. Good morning, everyone. Sales for the quarter increased 7.8% and $15.9 million. New stores, which we define as stores opened or acquired after March 30, 2013, added $24.6 million, including sales of $22.7 million from fiscal 2014 and 2015 acquired stores. Comparable store sales decreased 2.6% and there was a decrease in sales from closed stores of approximately $3.6 million, largely related to the BJ stores closing. There were 91 selling days in both the current and prior year fourth quarters. Year-to-date sales increased $63.1 million and $7.6% to $894.5 million. New stores contributed $78.8 million of the increase of which $70.5 million came from the fiscal 2014 and 2015 acquisitions. Partially offsetting this sales increase was the comparable store sales decrease of 1.4% and a decrease in sales from closed stores amounting to $9.4 million. There were 361 selling days in this and the last fiscal year. At March 28, 2015, the company had 999 company-operated stores as compared with 953 stores at March 29, 2014. During the quarter ended March 2015, the company added 10 stores and closed 28. Year-to-date, we added 92 stores and closed 46, including the 34 BJ stores. Gross profit for the quarter ended March 2015 was $83.7 million or 38.2% of sales as compared with $77 million or 37.9% of sales for the quarter ended March 2014. The increase in gross profit for the quarter ended March 28, 2015 as a percentage of sales is due to a decrease in labor cost as compared to the prior year quarter through continued focus on payroll control as well as a slight decrease in distribution and occupancy costs. Total material costs including outside purchases were flat as a percent of sales as compared to the prior year quarter. New stores generally put pressure on margins as we work through their opening inventories and work on getting the right mix of product in those stores. However, on a comparable store basis, total material costs decreased meaningfully from the prior year. Gross profit for the fiscal year ended March 2015 was $353.3 million or 39.5% of sales as compared with $320 million or 38.5% of sales for the fiscal year ended March 2014. The increase in gross profit for fiscal 2015 as a percentage of sales is due to a decrease in total material cost as compared to the prior year particularly in tires. Labor costs were relatively flat for the full year as a percentage of sales as compared to the prior year. Labor productivity, as measured by sales per man hour, improved slightly over the prior year. Partially offsetting this gross profit improvement was an increase in distribution and occupancy costs as compared to the comparable period in the prior year, in part due to increased warehousing costs related to building inventory [indiscernible] to lower the impact on overall tire costs. Operating expenses for the quarter ended March 2015 increased $4.5 million and were $60.2 million or 27.5% of sales as compared with $55.6 million or 27.4% of sales for the quarter ended March 2014. The increase as a percentage of sales is due to the decline in comparable store sales in the quarter as well as an increase in due diligence costs as compared to the prior year quarter, partially offset by focused cost control. For the full fiscal year, operating expenses increased by $18.9 million to $243.6 million or 27.2% of sales from $224.6 million or 27% of sales through the prior year for similar reasons as described for our fourth quarter of this year. Operating income for the quarter ended March 2015 of $23.5 million increased by 9.8% as compared to operating income of approximately $21.4 million for the quarter ended March 2014, an increase as a percentage of sales from 10.5% to 10.7%. Operating income for the fiscal year ended March 2015 of approximately $109.8 million increased by 15.1% as compared to operating income of approximately $95.3 million for the fiscal year ended March 2014, an increase as a percentage of sales from 11.5% to 12.3%. Net interest expense for the quarter ended March 2015 at 1.6% of sales increased to $1.1 million as compared to the same period last year, which was at 1.2% of sales. Weighted average debt outstanding as compared to the fourth quarter of last year increased by approximately $79 million. There was an increase in capital reset recorded in connection with the 2014 and 2015 acquisitions as well as an increase in debt outstanding under our revolving credit facility to fund the purchase of these acquisitions. These weighted average interest rate also increased by approximately 20 basis points from the prior year. For the fiscal year ended March 2015, interest expense increased by $1.9 million, an increase of 0.2% as a percentage of sales as compared to the prior year. Weighted average debt increased by approximately $46 million and weighted average interest rate decreased by about 10 basis points. Effective tax rate was 37.5% of pretax income for the quarter ended March 2015 and 37.6% for the quarter ended March 2014. For the full fiscal year 2015, taxes were 37.8% of pretax income as compared to 37.1% last year. Net income for the current quarter of $12.6 million increased 5.4% over net income for the quarter ended March 2014. Earnings per share on a diluted basis of $0.38, increased 5.6% as compared to last year’s $0.36. For the fiscal year ended March 2015, net income of $61.8 million increased 13.5% and diluted earnings per share increased 12.6% from $1.67 to $1.88. Moving on to our balance sheet. It continues to be strong. Our current ratio of 1.1

[Operator:]

[Operator Instructions] We'll take our first question from Bret Jordan from BB&T Capital Markets.

[Bret Jordan:]

Hey, good morning guys.

[John Van Heel:]

Good morning Bret.

[Bret Jordan:]

John, I got it a second late; did you say what the comp impact from outright store closure was in Q4?

[John Van Heel:]

Yes, it was 200 basis points.

[Bret Jordan:]

Okay, great. And then, I guess as we look at Car-X and the past, the deal that was related to Midas, do you have the opinion to sell them tires and/or parts within that franchise agreement?

[John Van Heel:]

Yes, absolutely, we think that what we do for our 1,000 company-operated stores has a lot of benefit from the Car-X franchisees and business, so absolutely we will put that to work to benefit their business which will allow us to grow the chain. If you recall in 2012, we bought 17 stores from Tuffy Car-X and this is sort of the pay off, the idea was there was we will potentially have this kind of an opportunity down the road and it worked out that way, so I'm looking forward to improving their business, growing the chain to the benefit of the franchisees and Monro.

[Bret Jordan:]

And I guess, when we think about that from a distribution standpoint as you've got more store base in the Southeast and maybe towards the South, moving a little bit West, at what point do you need to put another distribution center into the network?

[John Van Heel:]

We've talked about that in Florida sort of in particular, I think we need to hit triple digit number of stores down there for us to look at that.

[Bret Jordan:]

Okay. And then one final question. We look at current Q1 comp expectations, and I guess given the favorable pricing trend year-over-year and what should be maybe some accumulated demand from a tough winter and miles driven, what are the puts and takes to get to a flat comp? And I guess, we are against the plus 1 in the prior year, but I guess what are the moving parts this quarter?

[John Van Heel:]

Yeah, the tire pricing is certainly a help. We are up against down 1 in June, so basically we need to run up a couple of percent in June to get to something above flat. And I think really the opportunity that we have is that we comped in June. That relates the same way to the rest of the year, we are up against down 2 for the rest of the year and we’re going into that with coming off of a positive oil change traffic for the last two years and with positive inflation on the tire side, which is the opposite of what we had last year. So that’s really the opportunity for the remainder of the quarter and for the rest of the year.

[Bret Jordan:]

Okay. And I got one last housekeeping. What’s the monthly progression on Q4’s comp?

[John Van Heel:]

So Q4 was -- down 2.5% in January, down 5% in February and flat in March.

[Bret Jordan:]

Okay, great. Thank you.

[Operator:]

We will go next to Rick Nelson with Stephens.

[Rick Nelson:]

Thanks, good morning.

[John Van Heel:]

Good morning Rick.

[Rick Nelson:]

Turning to our long-term growth target, 20% EPS growth this morning, why should this be below trend here. We’ve got harsh winter, tire price inflation, actually [indiscernible] acquisition pipeline seems to be very good. What are the pressures?

[John Van Heel:]

Well, I think coming off of last year and Q4 with the start we’ve had, we are trying to put a number out there that we can hit. I think that is a big piece of it, and what I am looking for is to show that the inflation that we have on the tire side will stick and that the initiatives that we’ve got underway will help us produce traffic in sales, so I guess we’re trying to make sure that we are reasonably conservative given what we’ve got at the start of this year, which is a April that’s down on top of a positive last year and May that is ahead.

[Rob Gross:]

Yeah, Rick, we do a good job making more money. I think the focus as John articulated in the call is, it’s about time for us to generate some comp store sales and we are going to do that not at the cost of profits, but again 1 to 3 comp for the year, it was better than we have been the last couple, so let’s get to that point, if we do that certainly we always protect the bottom line.

[Rick Nelson:]

In terms of the NDA, I think you mentioned you have more than 10 NDAs, if you could quantify that and a number of stores is in existing or new markets?

[John Van Heel:]

Yeah, they are within our markets and they – as I have said in the past, that trend level has represented more than one year of growth and certainly us having more than that still qualifies as well more than one year of growth. We see a lot of interest from independent dealers right now in transactions.

[Rick Nelson:]

I think you mentioned in the past, five to 40 stores --.

[John Van Heel:]

Yes, generally that is the case.

[Rick Nelson:]

Is there some potentially bigger transactions out there?

[John Van Heel:]

Yeah, Rick, I would tell you that as we've said in the past, we are interested in anything that's at the right value for our shareholders, but we don't comment on rumors that might be swirling around.

[Rick Nelson:]

Also I’m interested in the digital spend, what's required there? It sounds like a lot of improvements coming to the website et cetera if that's part of the incremental spending or that's just a shift in the spend.

[John Van Heel:]

It's more of a shift. We are shifting – what we are finding in the digital area is that we are getting more efficiency out of our spend. We certainly needed to add some resources in terms of capability to our team and we've done that, again, globally as more of a shift in spend than an increase.

[Rick Nelson:]

Okay. Thanks a lot and good luck.

[John Van Heel:]

Thank you.

[Operator:]

We'll go next to Anthony Deem with KeyBanc Capital Markets.

[Anthony Deem:]

Hi, good morning.

[John Van Heel:]

Good morning.

[Anthony Deem:]

So you did 15% acquisition growth in both fiscal 2013 and fiscal 2014. Fiscal 2015, you had 10% growth target. Historically the framework has been on 10% acquisition growth, $0.09 to $0.12 EPS accretion after years two and three of integration. So it seems to suggest to me that the number should be higher than the $0.12 to $0.17. I am just wondering if you can reconcile that disconnect for me, perhaps quantify any dilution from recent deals, incorporate into that $0.12 to $0.17 accretion number.

[John Van Heel:]

Yeah, I think when you look at it, that relates to the fiscal '14 and '15 acquisitions. The fiscal '13 acquisitions were in our comps this year. So perhaps a bit of that is some comp pressure on those, but if you look at the 5% that we did in fiscal '14 and the 10% that we did in fiscal '15 and you look at those numbers, I think you will find it tied into the $0.09 to $0.12 accretion. That’s the accretion standard that we give for the 10% acquisition growth. Sorry, I need to be specific in that.

[Anthony Deem:]

Okay. Then shifting to Car-X.

[Rob Gross:]

You got that Anthony. This is the third year which we talked about materializers, but it then becomes part of the comp base so we don't address in that way.

[Anthony Deem:]

Okay, very good. Thank you very much for clarifying that.

[John Van Heel:]

If you want to think about it that way, we again this year had a 1% comp hurdle rate for accretion on the comp store sales side. So the business is producing that 1% hurdle rate instead of a 2% to 2.5% rate and that's a follow-on benefit from those prior acquisitions.

[Anthony Deem:]

Okay, thanks for clarifying that. On Car-X, I am wondering if you can share what you paid and also strategically, can you talk to your longer term ownership intentions of these franchises? Are there opportunities to buyout these franchisees and also do you see more opportunities in the marketplace to buy franchise chains?

[John Van Heel:]

So with regard to the purchase price, we don't disclose that. We do have to file reports and things where some of that information may be a part of. But with regard to the opportunities with franchise locations going forward, our primary objective is to go in, improve the business with what we have developed for 1,000 stores. I think one of the difficulties of franchise systems themselves is that from time to time, there is a need to operate stores and I think certainly as we look at it, we view ourselves as much better placed to do that effectively than at least the prior situation with regard to the Car-X stores.

[Anthony Deem:]

Okay. The -- can you -- sorry if I missed this, what were tire units in the fourth quarter versus sales?

[John Van Heel:]

Tire units were down one in the fourth quarter.

[Anthony Deem:]

Okay. And then, also the 2016 outlook on tire units, what is incorporated into your comp outlook of 1 to 3?

[John Van Heel:]

Flat.

[Anthony Deem:]

Okay. And then just lastly on 2016, what’s the interest expense we should model? Sorry, if I missed that.

[Cathy D'Amico:]

It’s about $11 million, Anthony.

[Anthony Deem:]

Thank you.

[Cathy D'Amico:]

You’re welcome.

[John Van Heel:]

Sure, thank you.

[Operator:]

We’ll go next to James Albertine with Stifel.

[James Albertine:]

Thanks for taking the questions and Rob, congratulations on signing on again for another three years. Look forward to continuing working with you.

[Rob Gross:]

I look forward being here.

[James Albertine:]

Two quick questions. One on the acquisition environment overall and the second one, just very quickly, another question on Car-X. The first on acquisitions. Can you talk to sort of the trends in acquisition multiples as you are seeing them and if there is an increase and sort of interested acquirers out there, it seems like there has been some dynamic changes afoot rumored or otherwise? So, wanted to get your opinion on that? And then a quick follow-up on Car-X.

[John Van Heel:]

In general, for the 5 to 40 store deals that we’ve been executing on, there is no change in the multiples that we see.

[James Albertine:]

Okay. Does that increase private equity interest, for example?

[John Van Heel:]

No. I’m sorry, I said there is no change in multiples that we’ve seen, maybe I didn’t understand your question.

[James Albertine:]

So, multiples and then also in terms of the number of interested parties that are looking to consolidate the industry?

[John Van Heel:]

For those deals, we haven’t seen anything significant in terms of new entrants into that consolidation area.

[Rob Gross:]

I think on the bigger deals, I mean, you saw private equity guy get involved to a percentage ownership with some of the $200 million or $300 million sales company that might preclude us as it did with that one for getting involved. We’re not going to be at the high end of the purchase range. We will continue because it is prudent to offer a floor and growth at much less risk than upping our multiples. And I think there is plenty of opportunity for us based on the number of deals, which was a record done last year and number of deals as well as what we see coming forward this year to grow the business by taking less risk and the higher the price you pay, the more risk is involved. So, that means, we’re not going to get 300 store chains done or $300 million sales deals done. We’ll let others go into that space and we’ll see how that plays out.

[James Albertine:]

Understood. I appreciate that additional color. And then the follow-up if I may, on Car-X, historically you’ve talked about sort of 800 to 1,500 basis point opportunities with respect to your target for acquisitions in terms of once you take control kind of rolling that up into sort of the mid-row operating margin target. How do we think about sort of a franchise format kind of flowing through the model? We talked about royalty revenues but you’re also taking ownership of the headquarters and some labor. Just wanted to understand in a little bit more depth as possible kind of the flow through the system for those 146 stores.

[John Van Heel:]

Yeah. First of all, that -- well, I guess the way we see growing profit there is primarily through opening new locations. There is interest in the franchisee group to open new locations, we can support that, and we can have a significant impact on EBITDA out of that business by opening a reasonable number of new locations, again, leveraging what we've built and we maintain here for our 1,000 store chain. So very efficient for us and very high return for us.

[Rob Gross:]

I think if you think and we know that Monro's operating margins have proven to be significantly above what the industry does, layering in some of those opportunities to the Car-X brand to make their brand the most efficient and most profitable franchise operation out there creates huge growth opportunities for others potentially wanting to take advantage of some of the things we might be able to offer franchisees that others can't. So it's not the normal 800 to 1500 bps of operating margin, it will be potential growth of the chain, the healthier the franchisees are the more profitable they are, the better we are going to perform.

[James Albertine:]

Understood. Well, thanks again everyone and good luck in the next quarter.

[Rob Gross:]

Thanks.

[John Van Heel:]

Thank you, take care.

[Operator:]

We'll go next to Robert Higginbotham from SunTrust.

[Robert Higginbotham:]

Good morning everyone.

[John Van Heel:]

Good morning.

[Robert Higginbotham:]

My first question has to do with the operational enhancements that you spoke of earlier in the call, John. In the past, you’ve been pretty confident in saying that despite some disappointing top-line trends that you weren’t losing share, I'm wondering if you still feel that that's the case and as you look at these enhancement opportunities, are you behind the curve on some of these elements relative to your competition or would these moves put you ahead?

[John Van Heel:]

So, with regard to where we stand versus the competition, of course, we see a lot of details from competitors in the acquisitions that we're or the NDAs that we're involved with. So, no, I don't think we're losing ground to the competition. Again, the building block for me is oil change traffic and that's been positive for the last two years. What we're looking at is the opportunity to really offset some of those dynamics in the marketplace that cause choppier sales and frankly, I think we can do a better job. We recognized that in order to get there, we needed some additional experience and help internally and our team has really come together around that. With some of those firsts for Monro, they will definitely put us ahead of most of our competitors. So, it's really more than anything a reaction to the fact that we operate in a fragmented market, and we never -- we've had deflation over the last couple of years and we just haven't produced -- that held back the comp some. I think with that deflation turning around; we can build off the positive oil change traffic that we've had to produce positive comps this year.

[Robert Higginbotham:]

Thanks. And to revisit Car-X a bit, buying a franchise business model seems like a bit of a strategic shift, in the past, you've expressed a pretty clear favoritism towards Company-operated stores. Is there something unique about this opportunity than others, is there something changed in the landscape of opportunities in the company-operated world, I guess, in that sense, is there something different about the way you see the world and how you approach these acquisitions?

[Rob Gross:]

No, again, I mean, what was it, three years ago, certainly it's public information, we had a high interest in Midas, which is bigger, was [indiscernible] performing and was a national footprint, so there was more risk involved. In this one, this is a culmination, as John said of the deal that we did three years ago that gave us right of first refusal that -- it’s paying off now with 146 stores that are in our current markets, within our current distribution center that is a small piece of what this company is. Albeit it will grow, it still won’t grow to the effect or the pace that Monro as a company-operated store operation is going to do and it is just a compelling value for our shareholders without a lot of risk.

[Robert Higginbotham:]

Okay, that’s helpful. And the last sort of housekeeping question is, what has been the store growth of Car-X over the past couple of years?

[John Van Heel:]

I think, they have maintained sort of a steady state where they are right now. Again, we think that there is opportunity to expand from that.

[Robert Higginbotham:]

Okay. Great, thank.

[John Van Heel:]

Thank you.

[Operator:]

We will go next to Michael Montani with Evercore.

[Michael Montani:]

Hey, guys, good afternoon. I wanted to ask about traffic and ticket, if you could just share what that was in the quarter and for last year. And then when you look at your guidance of up 1 to 3 for next year, what is the underlying assumption for a traffic and ticket to get to that range?

[John Van Heel:]

It was mostly traffic – traffic was – overall traffic was down in the quarter due to the disruption that we talked about. So that was the biggest piece for the quarter. For next year, like we said, most of the comp is pricing and ticket is basically flat to slightly positive with tires as I said, earlier being flat as a part of it.

[Michael Montani:]

And I guess you had mentioned earlier 200 bps as headwind from weather, so obviously that’s probably 1 to 1 for traffic. So normalizing for that, was ticket actually positive in fourth quarter than given your tire pricing?

[John Van Heel:]

No, it was basically flat. It was really mostly traffic in the fourth quarter.

[Michael Montani:]

And just to follow up on the opportunity from the tire tariffs, to the extent you’re able to get cost reductions that would obviously be incremental. But in the fourth quarter in particular, can you just share what was the kind of increase in tire gross profit dollars per unit, was there like a nickel benefit in 4Q just as we think about trying to build that out into next year and how much of a tailwind it could become?

[John Van Heel:]

No, I think you should focus – again, we made the comment that the fourth quarter was the highest gross profit dollar quarter for us. And I think again, we’ve given you the profitability metrics in some of what I gave in the script $1 of gross profit is equal to $0.05, 1% volume is equal to $0.025 and you’ve got the operating margins at the mid-point. So I think you’ve got – those are the elements we were looking to give you to allow you to build on that.

[Michael Montani:]

And just lastly then on Car-X, can you just give us the percentage of EBIT rate and when you said that the stores are performing like Monro, was that meaning like your service stores doing 650,000 of revenue or like the consolidated chain average of revenues?

[John Van Heel:]

No. Yes, those stores are on the average of what our service stores are, which is between 600,000 and 700,000 a store.

[Michael Montani:]

And just the EBIT margins, if I missed that I am sorry.

[John Van Heel:]

Well, we gave you an EBITDA number, so the EBIT margin is high. You can probably back into what our revenue might be or in that range and use that EBIT -- EBITDA to sort of get there. And we also said, we’re going to be slightly accretive this year, so you shouldn’t be building any significant contribution this coming year from Car-X.

[Rob Gross:]

Remember, Cathy talked about this business doing, whatever, approximately $160 million in EBITDA and John said the Car-X will be $2 million. So while it's a great opportunity and a great growth vehicle, let's keep it in perspective to where the company is.

[Michael Montani:]

Thanks a lot.

[Cathy D'Amico:]

Thank you.

[Operator:]

We will go next to Scott Stember with C.L. King.

[Scott Stember:]

Good afternoon, guys.

[John Van Heel:]

Hey, welcome back, I guess.

[Scott Stember:]

Gladly back. Can you maybe just talk about Car-X within the franchisees, how they have been performing at the store levels sales growth-wise and maybe just talk about the health of the individual franchisees if you had to put it into buckets?

[John Van Heel:]

Yeah. Again, we are not going to comment on businesses we don’t know on an individual franchisees or independently owned. I think we can say that last year's comp performance was good. And again they don't add the exposure to tires, but they performed very well last year, which is part of the compelling value we saw. They are good operators, they live in the business and we think the great opportunity for us to help them make more money and grow the chain otherwise we wouldn't have gotten involved.

[Scott Stember:]

Got it. And maybe for you to just get a little bit more granular with the revenue streams that will be coming in in the different buckets from Car-X. We have royalties. Can you just talk about the stores that are owned versus leased and potential royalties, I mean rents coming from that and maybe just break that out a little bit more?

[John Van Heel:]

If you look at what I gave you in the script, I think you will have the elements to come back to that, come back to a revenue number. The royalty there will be basically all of our revenues. And so it's not more -- it's that simple. We do have some opportunities going forward to sell some parts based on our ability to source that very attractive costs for them, but really the most significant piece of the revenue will be royalty.

[Scott Stember:]

Got it. That's all I have. Thanks so much for taking my questions.

[John Van Heel:]

Thank you, Scott.

[Operator:]

We have time for one more question and that will come from Bret Jordan with BB&T Capital Markets.

[Bret Jordan:]

Hi, just a follow-up on that same line. If we look at the Car-X revenue stream, do you have any expectation of part sales in your current year guide? And I guess to some extent is there a contract issue like there was with Midas where the franchisees need to buy from you if you can distribute to them. And last piece of that question, what do you expect the general margin of part sales to the franchisees today?

[John Van Heel:]

So the first was, we don't have a contract requiring them to buy. They are free to buy from whom they choose. We think we have a lot of compelling things to offer them. Secondly, we do not have any dollars baked into next year and I wouldn't suggest that any significant number of dollars be baked in to next year. So that guidance will -- it doesn’t incorporate that. And third, because we are not working in numbers for the guidance, I mean we are not going to talk about what we would sell to them. And I think you could expect that we might have transfer costs that would be similar to what we have to our own stores -- be attractive.

[Bret Jordan:]

Perfect. Thank you.

[John Van Heel:]

Thanks.

[Rob Gross:]

Great, thanks everybody

[Operator:]

And with no further questions in the queue, I would like to turn the call back over to John Van Heel for any additional or closing remarks.

[John Van Heel:]

Thank you. Thank you all for your time this morning. I’m looking forward to sharing our successes in driving traffic and sales through our new initiatives with you as well as the growth we expect through acquisition opportunities we’re actively working on. Our business model should produce another year of double-digit EPS growth on top of the 40% increase over the past two years. We appreciate your continued support and the efforts of our employees that work hard to take care of our customers every day. Thanks again, and have a great day.

[Operator:]

This does conclude today’s conference. Thank you for your participation.