Monro, Inc.

stores in 98 franchise locations as of September 28, 2019. During the second quarter, we added one company-operated store and closed six, of which five are temporarily closed as a result of damage sustained during Hurricane Laura in Louisiana and Tropical Storm Isaias in the Northeast. A complete bridge of our second quarter fiscal 2021 earnings per share performance with same-store compared with the same period last year, as presented on slide 9. The 11.4% decrease in comparable store sales resulted in a corresponding 34 cent earnings per share decline. As we previously noted, every 1% decline in comparable store sales translates to roughly 3 cents in earnings per share loss. Partially offsetting the comparable store sales decrease was the benefit of our cost reductions, lower expenses due to a year-over-year reduction in our number of stores, and the positive impact of our non-comp stores. Also included are higher recruiting expenses, which reconciles us to our adjusted earnings per share of $0.39 in the second quarter. As previously noted, this excludes approximately $0.01 per share related to Monroe-Ford initiatives and management transition costs. Turning to slide 10, our financial position remains strong, and we have flexibility to execute our growth strategy. As a result of our actions to drive improved business profitability and bolster our working capital position, we generated approximately $126 million in operating cash flow during the first half of fiscal 2021, compared to $80 million for the same period last year. We invested approximately $24 million in capital expenditures primarily to support our investments in stores and technology, and paid $15 million in dividends to our shareholders, as well as paying approximately $15 million in principal for financing leases. We were able to reduce our bank debt net of cash by approximately $71 million during the first six months of fiscal 2021. We believe that we are well positioned to continue to generate strong operating cash flow in the second half of fiscal 2021. At the end of the second quarter, we had net bank debt of $150 million and a net bank debt to EBITDA ratio of 1.1 times. As of October 24, 2020, we had cash and cash equivalents of approximately $55 million and availability on our revolving credit facility of approximately $365 million. Moving on to our financial assumptions for fiscal 2021, The COVID-19 situation continues to evolve with a resurgence in cases in some regions and a significant amount of uncertainty in the upcoming months. Therefore, it remains difficult to accurately forecast the impact of the pandemic on our future operations, and we are not providing fiscal 2021 guidance at this time. On slide 11, we have provided our updated financial assumptions to assist with your modeling. We are making solid progress on our rebranding and re-imaging initiatives, and now expect a capital expenditure range of approximately $40 million to $50 million, assuming the transformation of approximately 100 to 150 stores. In addition, we will continue to leverage our diverse and global supply chain and expect tire and oil costs to remain relatively stable year over year. Moving on to our expected cost reductions, we realized approximately $5 million in additional cost savings during the second quarter, on top of the $15 million achieved in the first quarter. For the second half of the fiscal year, we expect to achieve $5 million to $10 million in additional cost savings. Overall, we expect lower cost savings during the remainder of the fiscal year as we reinvest a portion of these savings in our business to drive top line growth. As a reminder, we also expect previously announced store closures to benefit our operating income by approximately $3.8 million in fiscal 2021. Looking beyond fiscal 2021, we anticipate about $15 to $20 million in annual structural cost savings, in addition to $5 million in annual benefits from store closures. And with that, I will turn it back to Rob Meller for some closing remarks.

Rob Meller Well, thank you, Brian. We continue to improve our business profitability and generate significant cash flow while making solid progress on some of our most important growth initiatives, including our store rebrand and reimage initiative and the acquisition of 17 stores in Southern California. Overall, we remain well positioned to capitalize on improving demand trends and have the financial flexibility to execute our strategy to deliver long-term value for our shareholders. Now, before turning over the call to Q&A, I'd like to provide a brief update on our CEO search. The process is progressing well, and the Board is assessing both internal and external candidates. Our priority is to find the right leader who can continue to build upon the momentum that we've seen from our Monroe Forward strategy. We have a number of transformational initiatives underway that are critical to driving sustainable growth and we believe our next CEO will be well equipped to join with and lead our team on the path towards long-term success. As we have recently onboarded new teammates, I'd like to take this opportunity to highlight our corporate social responsibility efforts, which are ongoing across our organization. Monroe strives to maintain an environmentally and socially conscious corporate culture. and our core values have an important role in our strategic planning. Chief among our initiatives is strengthening our relationships with our diverse employee base, as well as our customer and communities in which we operate, and which we know will be an integral part of our success going forward. With that, I'll now turn the call over to the operator for questions.

Thank you. At this time, we will conduct a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star 1 to ask a question. One moment while we pull for our first question. Our first question comes from Brian Nagle with Oppenheimer. Please proceed with your question.

Hi, good morning. Thank you for taking my questions. Good morning, Brian. So I've got a couple of questions just with regard to sales. And I apologize for the nearer term nature of the questions. I mean, clearly the environment's extraordinarily fluid, as you mentioned, and we've seen elsewhere. But is there any way to explain more in depth what seems to be a sales moderation approach in the month of October from trends in the quarter. And then the second question is you talked about, you know, within the quarter, a number of your stores or a larger number of stores now comping positive, but the total comps are still for the company were down, you know, 11% or so. What explains that variability? Is that largely virus or COVID related or are there other factors at play between those markets? Thank you.

Yeah, Brian, I'll start and I'll let Rob Rakowski add any color. I think if you look at the performance as we've charted it out on slide five of the materials, you know, we are clearly, with our service categories being, as you know, oil, brakes, and tires, very highly correlated to vehicle miles traveled. I think that As you look at October, the moderation that we saw in our top line is very much in line with moderation in that key indicator. And the Do It For Me side of the business has been typically more sensitive to those vehicle miles traveled. And if we saw that, not only as we saw a strengthening September with vehicle miles traveled improving, but also as it fell off into late September and early October, our correlation to that as well. What we are happy about and encouraged by, as we said in our prepared remarks, is the outperformance of our key category being tires against other US retail tire unit sales. And you can see the correspondence and the correlation between those sales as well against vehicle miles traveled. We just did a really good job as a company and really utilizing our new category management tool to what we'd see as outsized performance in our tire category during that period.

Yeah. Brian, to the point around the comp stores, I think if we take a step back, I think we've seen sequential improvement and growth in the number of comp stores throughout the pandemic. as demand has increased. And we're seeing an, I'll call it an outsized percentage of comp stores really coming from our entire focused formats. And as such, the Northeast has been outpacing the rest of the country with the number of comp stores due to the nature of their format.

Got it. Okay, very helpful. Thank you. Thanks, Brad.

Our next question comes from Jonathan Lamers with BMO Capital Markets. Please proceed with your question.

Thank you. Question for Robert Meller on the CEO search. Can you tell us which search firm was hired and maybe what length of time you would consider appropriate for the search?

Spencer Stewart is leading the search along with our board and you obviously recognize the firm and they've worked with Monroe in the past. We're actively moving forward and we're in the process of interviewing candidates at the present time and so it's actively being pursued and I think as you know it's a first class search firm and we're fully engaged in it. As to a timeline on that, I think it's key that we get the right individual that has the qualities that, you know, obviously you're familiar with. And so we're not going to rush to, what should I say, rush to judgment, but we are pursuing it actively and we hope that in the near future we'll have a candidate in place.

Okay, thanks. Sure. And for Rob and Brian on the IT side, can you expand on where the implementations of the two new systems, the new staff scheduling system and the dynamic tire pricing system were in the quarter? And maybe for Brian, can you give us a sense for how much more room for improvement there might be or the ROI you're modeling out from those projects?

Yeah, absolutely, Jonathan. If you look at the, in terms of where we have rolled out so far, related to the store staffing model, we're just over 1,000 stores rolled out as we sit today. The remaining will be completely rolled out by the end of our Q3. So still, the benefit's still ramping there. I think we continue to see as more and more stores move to that new staffing model, we're obviously seeing the benefit ramp through our financial performance and our ability to drive efficiency in our labor model. And, you know, I think we saw more of that in Q2 than we saw in Q1, and I would expect we would see additional benefit in Q3 with more stores on the program. And obviously, anytime you roll something out, there will always be continuous improvement that you'll drive off of that, and this now gives us the tool to do that. Importantly, I think it really positions us well to react to demand going down or up, right? We know that there's uncertainty ahead, and we're hoping for the best, obviously, in terms of the COVID pandemic. But, you know, this really gives us a much tighter control in place to be able to manage demand in either direction as we move forward. The second one is the tire category management tool has rolled out to more than 800 stores as we sit today, and those will also be fully rolled out by the end of Q3. And I do think, again, it's a very similar commentary where we expect continued benefits from that as they roll out and also really gives us much better control over a key category that is, you know, obviously going to be important to us regardless of the macro demand trend environment.

Thanks. And, Brian, a question on the acquisitions. For the 17 stores acquired in Q2 and the groups where you signed NDAs, how did the long run margins for those compare to Monroe's existing operations? I'm thinking about the operations on the East Coast where you have owned distribution.

That's a great question. We obviously have invested in a platform out on the West Coast. And we did that through a great acquisition out there with Certified Tire. And those stores are performing very well and give us great encouragement to continue to add additional stores to that. So I think the primary benefit really there is as we add scale and add storefronts out west, we will continue to leverage the investment we already made with our initial acquisition of Certified out there. that will continue to drive profitability across the entire group of California stores. Related to distribution, we do have own distribution out west through a warehouse we acquired as part of the certified acquisition, and that's really allowed us, along with really good partnerships with our secondary supply points and manufacturers out there, to maintain a pretty consistent cost of goods sold profile out on the West Coast. I think we are encouraged by the performance there, really performing as expected in our pro formas, and we will expect the same out of these 17 stores that we're now acquiring.

Thanks. And Brian, could you just break out the monthly comps for us in the Q2 and Q3 to date?

Yeah, we were down 12% in July, 13% in August. 8% in September, and we said we're down 12% for fiscal October.

Thanks. I'll pass the line. Thanks, Jonathan.

Our next question comes from Brett Jordan with Jefferies. Please proceed with your question.

Hey, good morning, guys.

Morning, Brett.

Good morning. I think you called out the south maybe being the stronger region relative to the north on the east coast. Could you give us the spread sort of how many basis points difference. And then I guess since we are getting a bigger West Coast presence, could you sort of give us a ballpark for how the Western stores did relative to the company average?

Yeah, certainly. So the South and the Midwest, we kind of said last call, they were about 500 basis points performing better than the Northeast. That's been pretty consistent, maybe narrowed a little bit in the second quarter, but pretty consistent. As far as the West Coast, it's a little more difficult just because we don't have a comparable store sales base to talk to it in the frame of reference of growth year over year. But like I said earlier in my comments, performing in line with our pro forma expectations of that business when we acquired them.

Okay. And then I guess to understand the pricing system for tires, I mean, you called out that your gross margin in tires was up as a result of it. You know, I guess I would expect a pricing system that drives volume would be more inclined to cut prices. Is it more a – identify a tire that generates a higher margin to you and offer it to the customer when they come in looking for a comparable product? Or could you maybe describe how that is either adjusting tire prices on a like-for-like basis or what really about it describing the margin improvement?

Really, the tool looks at the price elasticity and compares what we believe the velocity will be and the volume versus the margin and makes decisions on our pricing versus what we're seeing in the competitive market, and it'll adjust. And at the end of the day, the tool can optimize for volume or margin, and currently we have it tweaked to make sure that we're competitive across the line, but skewed towards increasing the margins. And we can do that in real time. All the tool allows us to look at the entire portfolio, which we haven't been able to do in the past, to make those real-time decisions and changes to our mix.

And I think, Brett, just to add on to that, importantly, you saw absolute expansions in our margin percentages within our tire category. And you saw relative strength in our volume compared to what we presented as the U.S. tire retail industry unit sales. So I think, you know, it's accomplishing both, and it's going to depend kind of tire by tire whether there's more of a volume or a margin opportunity. But I think the tool is doing both at the same time, given our performance against the benchmark as well as our margin expansion.

Okay. I guess on that theme, you've commented in the past that you see a lot of competitors' numbers via your M&A. What's your take on market share? How do you feel you are doing relative to the underlying market in these last couple of quarters?

Yeah, great question. And I think our view on that is really kind of looking at the prepared remarks. You know, the information that we prepared related to vehicle miles traveled in the U.S. tire industry unit sales is consistent with what we're seeing in our over 10 NDAs that we have signed. as well as consistent with what we see from our franchisees in the CAREX model. So we feel that the information we presented on slide five is representative of our view of the industry. And I think what you see there is that our trend lines are at or above, on the tire side at least, where the industry is at, which gives us confidence that we're maintaining our competitive positioning. Okay, great. Thank you. Thank you.

Our next question comes from Rick Nelson with Stevens. Please proceed with your question.

Thanks. Good morning. Just to follow up on those comments about market share, I'm curious. We've had a number of franchise dealers report their September quarter, and we got servos and parts segmented at the same store. And it looks like Kim and Roe is tracking well behind those companies, particularly if we exclude collision repair from their numbers. And I guess we pull tires out of your numbers. If you could speak to that differential, do you think you're losing share compared to franchise dealers? And if so, why?

Yeah, thanks for the question, Rick. I think that if you look at, you know, I think you did a good job there of kind of explaining the two parts of our business in tires and in parts. I think the other large difference in us and a lot of the the other public numbers available comes down to geography. I've listened, obviously, to a lot of the same calls that you have. Really, what I hear as the themes coming through is a lot of strength in mountain and plains regions and pressure in the Northeast and Mid-Atlantic. Obviously, we have a disproportionate geographic exposure to the Northeast and Mid-Atlantic and nearly no exposure to mountain and plains. So I think as we see, there's a lot of differentiation between geographies. And my sense is that that's driving a large portion of that. It's consistent with if you look at vehicle miles traveled as well as tire unit sales by geography. We presented the consolidated view to kind of show that we're tracking in line with the national averages. But there's a large amount of disparity in that data between the Northeast and Mid-Atlantic underperforming. against much better looking trends in other parts of the country. So we feel good relative to our performance and our geographic exposure there.

Thanks for that. How do you get customers comfortable that you're taking COVID protections with their vehicles?

Yeah, we have from the very onset, I think we have taken stringent measures that are still in place today, stringent measures around cleaning, sanitizing, shields, face shields, masks, as well as social distancing within the stores. We continue to communicate that not only to teammates, but communicate those measures that we've taken digitally and to consumers, reassuring them that it is absolutely a safe environment to bring their vehicle in and conduct business with us. And we continue to do that. And I think that helps us also understand if the pandemic continues or takes a different twist, we're well prepared to execute those measures and re-communicate those to the guests and to our teammates. It's obviously been our number one concern and continues to be that.

Thanks for that. And finally, a question for Rob. Do you expect this individual is going to carry on the existing rebranding, re-imaging, all the strategies that were in place with Pratt? Or are you looking for new new ideas, and is e-commerce, do you see that being a part of the business, particularly in tires, in the future? Sure.

We're not going to diverge from the strategy that we put in place. Obviously, it's been successful. It's been in place for two years, three years, and I think we're really executing on it very well. So we're not into a change mode, if you will, So I think we're going to continue on that same path. And of course, part of the person's qualifications goes without saying our leadership and integrity and working well with the teammates we have in place. As to e-commerce, I think we've been on a, certainly, and you've followed the company closely in the last two or three years, we've pushed forward on technology, not only from the sales side, but also from the employee or teammate side in sizing the business. And I think we've benefited greatly from that during this COVID-19 period. So we're not going to divert from that. And I think on e-commerce, I think that's just going to continue on. I mean, you've followed the company. You've seen that we've pushed forward on that. And I don't see any, what should I say, retreat from that path. That's It's in place, the strategy's in place, and I think it was well-conceived, well-adopted by the teammates throughout the company, and we're not, what should I say, we're not going back, we're just going forward with it. And I think we've got a good foundation in place. I'm very, very proud and feel good about that. And as you know, we've certainly put the CapEx behind that strategy and behind, if you will, e-commerce. So I see the path going forward straight and up and to the right.

Thanks for those comments. I appreciate it. Good luck as we push forward. Thank you. Thanks, Ray.

Our next question comes from David Bellinger with Wolf Research. Please proceed with your question.

Hey, good morning. Thanks for taking the questions. So first, recognizing the comp sales decline in Q2 was mostly traffic-driven I'm curious on what you're seeing in terms of ticket trends. Any meaningful changes there or indications of trade down among your customer base?

Yeah, great question. In Q2, really, sequentially over Q1, the improved performance was driven largely by traffic. We saw consistent ticket quarter over quarter.

Got it. And then just following up on the regional trends, some of those underperforming markets like the Northeast and the Atlantic. Are you seeing any early signs of stabilization there, or maybe some indications of the same type of recovery curve now beginning to play out in those markets versus what you've seen across other parts of the country?

When we take a step back and look at the markets, in September, late in Q2, it looks like they were recovering. very consistent with the tire performance. And then in October with the tire retail units dropping, that part of the geography has stayed in line with that and has reflected the tire unit decline as well.

Got it. Thanks, Tim. Appreciate it.

Thanks, Tim.

Our next question comes from Stephanie Benjamin with Truist. Please proceed with your question.

Hi, good morning.

Morning. Morning.

I wanted to discuss the same-store sales a little bit. I believe in the first quarter and kind of some commentary in July, you guys called out some headwinds on the top line just from store closures or labor shortages. So I wanted to know if you saw anything similar to that in the second quarter. as you kind of navigated this environment that weighed down on your comp growth? Thanks.

Yeah, great question. And we did talk about the need to increase staffing to respond to some improving demand trends, which as we talked about, we did add 700 new teammates, primarily technicians, in the second quarter. I think, you know, as we look at it and kind of triangulate those ads against the demand levels that we saw during the quarter, we feel good that, you know, the staffing was there to support the demand that was there and there wasn't anything, you know, significant, if you will, left on the table regarding understaffing against demand. And most importantly, we feel really good about where we're staffed. As of right now, as we head into what we hope to be some colder weather and some snow.

Perfect. Thank you. And then I wanted to discuss a little bit, I think, with both the store staffing tool and the tire tool to be fully launched, as you said, by the end of 3Q. Just curious, what is the next big leg to the story or big investment that we should be looking out for? Is there an opportunity? for you to include a pricing tool across another service level, or what's going to be the big initiative that we should be watching out as we get through the third quarter?

Yeah, I think, I mean, most importantly and primarily our big focus, both from a resources standpoint and obviously capital, will be to continue to reimage and rebrand our stores. Technology has been, you know, the foundation with which Monroe Forward is built. but certainly we do know that improving the guest experience and driving incremental traffic to our stores is really dependent on our re-image and our brand standards and making ourselves more relevant to a large portion of our customers and consumers with a more tire-oriented banner. So that will remain our focus and really as we exit. I think as we talked earlier, there will be continuous improvement around what we've already launched including our Monroe University platform and how do we really drive that to continue to improve teammate productivity as well as our ability to continue to, you know, improve our business overall. So I think those are the big areas. I know Rob does have some category work being done outside of tires that, you know, will also come into focus as we move through the year.

Great. Thank you so much.

Thank you.

Thank you. At this time, I would like to turn the call back over to Mr. Miller for closing comments.

Thank you, and thank you all for joining us today and for your continued interest and support of Monroe. When I say Monroe, I mean that means your support of all of its teammates. I want to let you know, and I'm sure you do know, they're doing a terrific job in what we know is a very difficult environment. So your support and tuning in today is very much appreciated. And we look forward to providing you with an update on our progress next quarter. And also, we hope all of you have a great day and stay healthy and stay safe. And we look forward to speaking with you again. Take care.

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

Thank you.