Monro, Inc. (MNRO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to Monro, Inc.'s Earnings Conference Call for the Third Quarter of Fiscal 2025. [Operator Instructions] And as a reminder, this conference call is being recorded and may not be reproduced in whole or in part without permission from the company. I would now like to introduce Felix Veksler, Senior Director of Investor Relations at Monro. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we will be referencing a presentation that is available on the Investors section of our website at corporate.monro.com/investor. If I could draw your attention to the safe harbor statement on Slide 2, I'd like to remind participants that our presentation includes some forward-looking statements about Monro's future performance. Actual results may differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Monro's filings with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, on today's call, management's statements include a discussion of certain non-GAAP financial measures which are intended to supplement and not be substitutes for comparable GAAP measures. Reconciliations of such supplemental information to the comparable GAAP measures will be included as part of today's presentation and in our earnings release. Lastly, unless otherwise noted, all references to comparable store sales, category sales and units on today's call will be made on an adjusted for days basis, which adjusts for 1 fewer selling day in the current year quarter due to a shift in the timing of the Christmas holiday from the fourth quarter in fiscal 2024 to the third quarter in fiscal 2025. With that, I'd like to turn the call over to Monro's President and Chief Executive Officer, Michael Broderick.

Thank you, Felix, and good morning, everyone. This morning, I'd like to share an update with you on our third quarter accomplishments. After that, I'll outline several objectives that we plan to achieve in the fourth quarter. Before I begin, I'd like to recognize and thank all of our teammates for their dedication to Monro and our customers. Turning to Slide 3, starting with our accomplishments in the third quarter. We drove a sequential improvement in our year-over-year comp store sales percentage change from the second quarter and returned our business to year-over-year comp store sales growth in the month of December. We believe that our initiatives provide the foundation for continued momentum in our top line performance. Importantly, the year-over-year comp store sales percentage change in both our tire dollar and unit sales improved sequentially from the second quarter, and our tire category sales comp positive in the month of December, with year-over-year growth in unit in the quarter. We continue to leverage the strength of our manufacturer funded promotions, which allowed us to meet the needs of a value-oriented consumer. And now that we've completed the rollout of our ConfiDrive digital courtesy inspection process, we have continued to improve communications and educational selling that has built trust and further solidified relationships with our customers. ConfiDrive and our oil change offer, as shown on Slide 4, allowed us to drive sequential improvement in our year-over-year service category comp store sales percentage change from the second quarter. We drove year-over-year growth in both units and sales dollars for batteries, alignment and front end/shocks. And while we drove sequential improvement from the second quarter in our brake category, we continue to focus on returning this high-margin category to unit and sales growth. Consistent with general industry trade down dynamics, our gross margin in the third quarter continued to be impacted by a value-oriented consumer that traded down more of their tire purchases to our Tier 3 offerings. We also increased our level of self-funded promotions to attract value-oriented consumers into our stores. And while this pressured material margins in the quarter, we continue to drive labor optimization and efficiencies through productivity improvements including scheduling, training and our attachment selling initiatives. We remain committed to sales and unit growth and improving customer accounts, and we are willing to make the necessary price and promotional investments even if it puts pressure on our profitability in the near term. Now on to our objectives for the fourth quarter. Our preliminary fiscal January comp store sales are down 1%, adjusted for 1 additional selling day in the month. This is driven by weakness in tire category sales that were impacted by extreme weather, which resulted in temporary store closures and lower store traffic, partially offset by strength in our service categories, including brakes. We believe the extreme weather in January will benefit us in the coming months. We expect to leverage our initiatives to achieve our fourth quarter objectives, which include improving store traffic trends driven by our value-oriented oil change offerings as well as continued growth in tire units, accelerating the performance of our key service categories, utilizing the benefits from ConfiDrive and optimizing labor inefficiencies through continued improvements in productivity and maintaining prudent cost control. In summary, our initiatives are driving an improvement in our top line results. Our comp store sales trends improved sequentially from the second quarter, and we exited the quarter with year-over-year comp store sales growth in the month of December. This was led by our entire category sales, which come positive in December with year-over-year unit growth in the quarter. While we have more work to do to improve the performance of our high-margin brake category, we drove a sequential improvement in our year-over-year service category comp store sales percentage change from the second quarter and year-over-year growth in batteries, alignment and front end/shocks in the quarter. And although our gross margin took a step back in the quarter, we continue to be focused on sales and unit growth and improving customer counts and are willing to make necessary investments, even if it puts pressure on our profitability in the near term. We are confident we remain on a path to restore our gross margins back to pre-COVID levels with double-digit operating margins over the longer term as we return to top line growth. The traction from our initiatives will enable us to achieve our fourth quarter objectives. And with that, I'll now turn it over to Brian, who will provide an overview of Monro's third quarter performance, strong financial position and additional color regarding the remainder of fiscal 2025. Brian?

Thank you, Mike, and good morning, everyone. Turning to Slide 5. Our year-over-year comparable store sales percentage change improved 500 basis points sequentially from the second quarter of fiscal 2025. Sales of $305.8 million decreased 3.7% year-over-year, which was primarily driven by a 1.9% decline in comparable store sales unadjusted for days. Comp store sales decreased 0.8% when adjusted for days. As Mike just walked through, we returned our business to year-over-year comp store sales growth in the month of December. For reference, comps were down 1% in October and down 2% in November. We exited the quarter up 1% in December. Tire units were up low single digits in the third quarter, driven by mid-single-digit growth in units during the month of December. We also gained higher market share in our higher-margin tiers in the quarter. Comp store sales and approximately 300 of our small or underperforming stores were about 250 basis points higher than our overall comp in the quarter. Turning to Slide 6. Gross margin decreased 120 basis points compared to the prior year, primarily resulting from higher material cost due to mix within tires and an increased level of self-funded promotions to attract value-oriented consumers into our stores, which was partially offset by lower technician labor costs as a percentage of sales. Total operating expenses were $94.8 million or 31% of sales as compared to $91.3 million or 28.7% of sales in the prior year period. The increase on a dollar basis was principally due to higher store direct and departmental costs to support our stores. Operating income for the third quarter declined to $10 million or 3.3% of sales. This is compared to $21.4 million or 6.7% of sales in the prior year period. Net interest expense decreased to $4.2 million as compared to $5 million in the same period last year. This was principally due to a decrease in weighted average debt. Income tax expense was $1.2 million or an effective tax rate of 21.2%, which is compared to $4.2 million or an effective tax rate of 25.8% in the prior year period. The year-over-year difference in effective tax rate is primarily due to state taxes, discrete tax impacts related to share-based awards and an audit settlement of certain prior year state income tax returns. Net income was $4.6 million as compared to $12.2 million in the same period last year. Diluted earnings per share was $0.15. This is compared to $0.38 for the same period last year. Adjusted diluted earnings per share, a non-GAAP measure, was $0.19, and this is compared to adjusted diluted earnings per share of $0.39 in the third quarter of fiscal 2024. Please note that the Christmas holiday shift negatively impacted both diluted EPS and adjusted diluted EPS by approximately $0.05 in the third quarter of fiscal 2025. Please refer to our reconciliation of adjusted diluted EPS in this morning's earnings press release and on Slide 10 in the appendix to our earnings presentation for further details regarding excluded items in the third quarter of both fiscal years. As highlighted on Slide 7, we continue to maintain a strong financial position. We generated $103 million of cash from operations including $27 million of working capital reductions during the first 9 months of fiscal 2025. Our AP to inventory ratio improved to 179% at the end of the third quarter versus 164% at the end of fiscal 2024. We received $9 million in divestiture proceeds as well as $9 million from the sale of our corporate headquarters. We invested $21 million in capital expenditures, spent $30 million in principal payments for financing leases and distributed $26 million in dividends. At the end of the third quarter, we had net bank debt of $49 million, a net bank debt-to-EBITDA ratio of 0.4x and total liquidity of $521 million. As we have commented earlier and on recent earnings calls, we have made significant progress in several foundational areas, including gross margin expansion in the first 9 months of fiscal 2025, inventory optimization by leveraging strong vendor partnerships and our solid financial position. These foundational improvements, coupled with our market-facing initiatives, including our ConfiDrive digital courtesy inspection process, our oil change offer and focus on approximately 300 of our smaller underperforming stores as well as our relentless focus on improving the guest experience are setting us up for improved financial performance. Now turning to our expectations for the remainder of full year fiscal 2025 on Slide 8. Please note that fiscal 2025 is a 52-week year while fiscal 2024 was a 53-week year that benefited from an extra week of sales in the fourth quarter. We remain focused on sales and unit growth and improving our customer counts while making the necessary price and promotional investments to do so. We expect to generate at least $120 million of operating cash flow, inclusive of continued working capital reductions in fiscal 2025. The strength of our financial position, including our cash flow positions us to fund all of our capital allocation priorities, including our dividend during the remainder of fiscal 2025. Regarding our capital expenditures, we expect to spend $25 million to $30 million in fiscal 2025. And with that, I will now turn the call back over to Mike for some closing remarks.

Thanks, Brian. Our business has long-term durability in an industry that remains fundamentally strong. Our initiatives are driving an improvement in our top line results. This, along with our cash flow generation, will enable Monro to reap benefits as tire volumes continue to recover. We are poised to win with our scale, strategic relationships and our experienced management team. With that, I'll now turn it over to the operator for questions.

[Operator Instructions] Our first question comes from Seth Basham from Wedbush Securities.

Nice to see the progress on comps and gross profit comps. And we're wondering whether or not we'll continue to see improvement in gross profit comps going forward or you plan on accelerating investments in price and promotion and seeing mix deterioration such that will not be the case. What's the framework to work through?

Yes, related to gross margin. In the quarter, our gross margin declined 120 basis points. That was driven by material cost of 150 basis points partially offset by a decrease in technician pay of 30 basis points. So the increase in the material costs, as you mentioned, was related to the continued trade down of consumers to our Tier 3 tires as well as our increase of self-funded tire promotions. Going forward then, we expect similar pressure related to those material costs, given that consumer trade down and higher levels of promotional activity. So we remain committed to sales unit growth and improving our customer counts, and we're going to continue to make necessary price and promotional investments, which we believe this current environment requires.

Good to hear. And my follow-up question is just around the weather. You mentioned pressure in January because of the weather. Looking back at the full fiscal third quarter, do you think weather was a net benefit or a drag or neutral?

Seth, it's Mike. I would say the third quarter was neutral. And I would say what we experienced in January, the extreme weather, I think it's a good setup going forward, just like it has been. I've been looking for a winter and we got it. Although we had some disruptions with closed stores that affected our January results mostly focused on tire. We had momentum coming out of December and our service categories, all our major service categories, including brakes, were actually up and stayed up. So I would say that we have a good setup with winter and a good set up, really the sequential improvement of our sales and our team's performance is, obviously, will take us through Q4 and beyond.

Our next question comes from David Lantz from Wells Fargo.

So it seems like you're seeing the digital courtesy inspection drive some improvement in service categories. I was curious if you could parse out some of the benefits in a bit more detail and then how we should think about the drivers going forward?

It's Mike. I've been asked on this call in the past talking about the ConfiDrive and what would be some of the results that we should be looking for. When I look at what ConfiDrive has driven, and I just look at very objectively what the results are. Our traffic was down, but our average ticket was up, and our average ticket was up driven by our service categories. And so when I look at what we're doing, we're attaching really well. We need more customers, and that's what I'm committed to is driving our customer count, getting low single-digit growth in customers, but what the team is driving is strong attachment. I see it in batteries. I see it in alignment. I see it in ride control. This is the first time I've talked about this in that specific area. I absolutely, in Q3, was disappointed in my brake results. But January, it actually went positive. So all my major service categories are going positive. So from walking away -- ConfiDrive is absolutely delivering what I expected. It's a good process for our customers. It's a good process for Monro and our shareholders.

And then it seems like similar gross margin pressures could continue here near term. Curious if you can help give some color around how we should think about SG&A in the fourth quarter and if there's any early guardrails for next year?

Yes. As it relates to SG&A, as you saw, we had an increase in SG&A versus the prior year. And the driver of that really was our front shop labor costs, which we also refer to as store manager pay. And the primary driver behind that was just an investment in front shop labor to support that ConfiDrive inspection process. It's really important as part of the inspection process to have the right resources at the front counter to deliver the ConfiDrive educational selling process and that guest experience. So we believe we're seeing, obviously, as Mike just commented on the benefits of these investments in our service category sales. But going forward, we expect that our G&A expenses will continue to reflect this investment. Of course, we'll continue to find ways to drive productivity improvements in other areas of our G&A spend, but the investment in the front counter will remain.

Our next question comes from Thomas Wendler from Stephens, Inc.

You guys saw some continued growth in the Tier 3 tires during the quarter. What does that mix look like now? And then are you still purposely steering customers towards the Tier 3 category with some of the promotions? And is that where your self-funded promotions is focused?

Yes. Tom, this is Mike. The mix is in the high 20s on Tier 3. And I would say that we are absolutely driving the customer so they just don't go to Tier 4. There are definitely attributes of Tier 1 through 3 tires that we want to make sure that we are presenting to the customer. Just going to cheap tires doesn't feel like the right thing to do for Monro and its customers. What we are -- what I continually emphasize is the fact that when we recommend and we provide strong promotions, the customers see the benefit in that. And if they're happy with the tires, they live with it for 3 years, then they come back to us for other services, which are very important to me. It's about -- when I said high 20s, it's about 30%, just so I -- on the Tier 3.

Okay. Perfect. And then for my follow-up, has there been any kind of slowdown in the manufacturer funded promotions?

Not at this point in time. I would say there's nothing changing in the consumer environment, and we have -- we're very focused on making sure the manufacturers come along for this journey, making sure that the industry [indiscernible].

Our next question comes from Bret Jordan from Jefferies.

Could you give us the breakout of traffic comp versus price and the comp in the quarter?