Monro, Inc.

Good morning, ladies and gentlemen, and welcome to Monroe, Inc.' 's earnings conference call for third quarter fiscal 2021. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will follow at that time. If anyone should require operator assistance during the call, please press star zero on your touchtone phone. 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 now like to introduce Ms. Maureen Mulholland, Executive Vice President and Chief Legal Officer at Monroe. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us on this morning's call. Before we get started, I'd like to remind participants that during the course of this conference call, Management may make statements about Monroe's future performance that contain forward-looking information. Actual results may differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Monroe's filings with the SEC and in our earnings release, and include the significant uncertainty relating to the duration and scope of the COVID-19 pandemic and its impact on our customers, executive officers, and employees. 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 statements include a discussion of certain non-GAAP financial measures, which are intended to supplement but not to be substitutes for comparable GAAP measures. Reconciliations of such supplemental information to the comparable GAAP measures will be included in our earnings release. Rob Meller, Monroe's Board Chairman and Interim Chief Executive Officer, and Brian D'Ambrosia, Chief Financial Officer, are joining us today. For the question and answer portion of the call, our Chief Operating Officer, Rob Rakowski, will also be available to take questions. With that, I'd like to turn the call over to Rob Meller. Rob?

Thank you, Maureen, and good morning, everyone, and thank you for joining us today. This morning I will talk about our third quarter results and the positive outlook for our business. We had a tough third quarter, which you can see in our results. While there are a number of reasons for this, including general market conditions, the principal reason was our earlier success in downsizing our store staffing levels to align effectively our operations with the impact that the COVID-19 pandemic had on our revenues. Our prompt and decisive management actions allowed us to stay ahead of the curve. At the outset of the pandemic, we focused our efforts on right-sizing technician staffing levels at each store to meet lower demand. When demand picked up, we had to recruit hundreds of technicians, and in fact, we have recruited over 700 technicians since July. but ramping up this number of new teammates presented a challenge. Getting our new teammates on board, introducing them to our operating standards, and getting them to full run rate in each store could not be done in a day or even a week, for each new recruit takes time before they can become fully productive, and some just don't work out. This was reflected in our October and November labor productivity levels, and directly impacted our top line. Stores were not able to meet all the demand and sales opportunities were missed. During the third quarter, we accomplished the onboarding task and have reversed this trend. December was the best month of the quarter with earnings only a few cents below our pre-COVID-19 December results of last year. Our new technicians are making significant contributions to sales, margins, and earnings. January is looking even better, with positive comparable store sales ahead of last year's pre-COVID-19 levels. We are encouraged by these positive trends, and we are well positioned to drive higher same-store sales and profitability going forward. Importantly, we remain financially strong and well positioned to execute against all of our growth initiatives. We look forward to fiscal 2022 with confidence our organization is stronger battle-hardened and proud of coming through an unprecedented year our initiatives are working as brian will discuss further in a moment and we look forward with confidence in our business and with that i'll turn the call over to brian who will provide additional detail on all our financial performance and recent acquisition brian thank you rob and good morning everybody

Our performance in the third quarter, particularly in October and November, was challenged by general market conditions and lower labor productivity. The initiatives that Rod just discussed, along with improved market conditions, drove improved comparable store sales trends in December, which posted the best monthly comp store sales since the beginning of the COVID-19 pandemic. This has continued into January with a comparable store sales increase of 3%, supported by key sales improvements in our service categories. In looking at the third quarter results, an important takeaway relates to gross margin. Gross margin decreased 400 basis points to 33.8% in the third quarter. Variable gross margin was positively impacted by a 5% increase year-over-year in gross profit per tire, driven by the completed rollout of our tire category management and pricing tool. This improvement was more than offset by a higher sales mix of tires compared to service categories. As expected, service items can be deferred for a short time during periods of economic slowdown. Additionally, variable margins were negatively impacted by higher technician labor costs as a percentage of sales, especially in the first two months of the quarter. This was largely due to the addition of approximately 700 new teammates from July through October. As Rob discussed earlier, these new teammates required training to reach full productivity. We are pleased that our training initiatives, combined with the completed rollout of our data-driven store staffing model, have driven increased labor productivity as we move through the quarter. As a result, technician labor costs as a percentage of sales declined steadily in December and as well as January. As a reminder, also included in our cost of sales are distribution and occupancy costs, which are largely fixed in nature. We were able to reduce these fixed costs primarily through rent concessions, but lower comparable store sales outpaced these fixed cost reductions, resulting in lower gross margin year over year. We continue to execute disciplined cost control and saw benefits from our efforts to realign our marketing spend towards higher ROI digital channels and right-size store management staffing. The year-over-year decrease in operating expenses also reflects lower expenses from 29 fewer stores. Lower comparable store sales outpaced these fixed cost reductions and drove a slight increase in operating expenses as a percentage of sales. But importantly, while we experienced a decline in operating margin this quarter, We expect to generate increased operating margin against this lower fixed cost structure as sales improve. Net interest expense for the third quarter decreased to $6.8 million. This was driven by a decrease in our weighted average interest rate from lower borrowing rates on new leases, partially offset by an increase of weighted average finance lease debt in connection with our fiscal 2020 acquisitions and lease renegotiations. Our effective tax rate was 25.2% for the third quarter, compared to 24.1% for the same period last year. Net income for the third quarter was $6.7 million, and diluted earnings per share was 20 cents. Adjusted diluted earnings per share for the third quarter, a non-GAAP measure, was 22 cents, which excluded approximately 2 cents per share related to Monroe Forward Initiatives and a penny per share of benefit related to a reserve for potential litigation that was no longer necessary. This compares to adjusted diluted earnings per share for the third quarter of fiscal 2020 of $0.60, which excludes $0.03 of costs related to Monroe Forward initiatives and a penny of costs related to acquisition due diligence and integration. We continue to have ample flexibility to support our operations and execute our growth strategy. We generated $159 million in operating cash flow during the first nine months of fiscal 2021, representing an increase of 26% compared to $126 million for the same period last year. We invested approximately $39 million in capital expenditures, primarily related to our ongoing store rebrand and reimage initiatives, and investments in technology, and paid approximately $18 million for acquisitions. We distributed $22 million in dividends to our shareholders and paid approximately $24 million in principal for financing leases. We were able to reduce our bank debt net of cash by approximately $56 million during the first nine months of fiscal 2021. We are well positioned to continue to generate strong cash flow from operations in the fourth quarter and beyond. We substantially completed the rebranding or re-imaging of 104 stores during the third quarter. To date, we have completed the transformation of approximately 360 stores in a number of key markets, including rebranding 115 service stores to tire branded stores and continue to see outperformance of our rebranded and re-imaged stores compared to our chain average. We now expect a capital expenditure range of approximately $45 million to $50 million, assuming the transformation of approximately 150 stores in fiscal 2021. At the end of the third quarter, we had net bank debt of $165 million and a net bank debt to EBITDA ratio of 1.3 times. As of January 23, 2021, we had cash and cash equivalents of approximately $25 million and availability on our revolving credit facility of approximately $376 million. The impact of the COVID-19 pandemic continues to make it difficult to forecast accurately the impact of the pandemic on our future operations, so we are not providing fiscal 2021 guidance. We realized approximately $10 million in additional cost savings during the third quarter, on top of the $20 million achieved in the first half of the year. These cost savings resulted from the optimization of store management staffing, the improvement of our marketing efficiency, and general overhead cost reductions. During the fourth quarter, we expect to achieve approximately $5 million in additional cost savings. As a reminder, our previously announced store closures are expected to benefit our operating income by approximately $3.8 million in fiscal 2021. Looking beyond fiscal 2021, We continue to expect approximately $15 to $20 million in annual structural cost savings, in addition to approximately $5 million in annual benefits from store closures. I would now like to take a moment to provide an update on our acquisition strategy. We completed the previously announced acquisition of 17 stores in Southern California in the third quarter, expanding our growing presence in the West Coast region. These locations are expected to add approximately $20 million in annualized sales. We are particularly excited about the growth prospects for Monroe in this attractive and dynamic region. Despite the impact of the COVID-19-related lockdowns, this year we have achieved strong earnings contribution from our previously acquired California, Nevada, and Idaho stores. Our acquisition pipeline remains robust, with over 10 NDAs currently signed for opportunities ranging from 5 to 40 stores. Strategically located acquisitions and attractive valuations remain a pillar of our growth strategy, and we are well positioned to take advantage of the many opportunities for consolidation in our industry. And with that, I will turn the call back to Rob Meller for some closing remarks.

Thanks, Brian. We are encouraged that our initiatives are taken as evidenced by our strengthening performance late in the third quarter and January. Importantly, our strong cash flow and solid balance sheet provide us with the financial flexibility to support our business operations and make strategic acquisitions without substantially increasing our leverage. We have always conservatively managed our balance sheet and remain fully committed to doing so. This has allowed us maximum flexibility to execute on our growth strategy for the benefits of our shareholders, and we are confident that this will continue to create long-term sustainable value. Before opening up the call for questions, I would like to take a moment to provide an update regarding our search for a permanent CEO. We continue to make progress and are currently evaluating a number of individuals who we believe have the skills and experience necessary to drive our transformation forward. and build upon the momentum that our Monroe Forward strategy has created. We look forward to providing you with a more definitive update as soon as we are able. During this period of transition, I am proud of our senior leadership team for their exceptional commitment to driving our organization forward. I would also like to recognize the tremendous contributions of Maureen Mulholland, who was recently promoted to Executive Vice President, Chief Legal Officer. Maureen has served as General Counsel since 2003 and continues to partner closely with Brian and Rob in support of the ongoing execution of our Monroe Forward strategy and to ensure continuity across our business operations. I'd like to also highlight recent steps we've taken to further our corporate social responsibility efforts. Our execution of Monroe Forward naturally incorporates building our long-term strategy in a responsible and sustainable manner. We view our responsibility to our teammates, customers, the communities in which we operate, and doing our part to take care of the environment as key components of long-term success. As part of our commitment to being a good neighbor in the communities where we operate, I'm pleased to announce that through the support of our customers and teammates, We raised over $160,000 for Feeding America during the third quarter. With strong support from our board of directors, we are in the midst of increasing the formalization of our corporate responsibility efforts and are committed to expanding transparency in the coming months. And finally, I would like to extend a sincere thank you to our teammates for their incredible contributions to our company. and for their ongoing commitment to safety, serving our customers, and driving operational excellence despite the challenges in the environment. And with that, I'll now turn the call over to the operator for your questions.

Thank you. 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 the handset before pressing the start keys. Our first question is from Jonathan Lammers with BMO Capital Markets. Please proceed.

Good morning. Good morning. Good morning, Jonathan. Brian, you mentioned the re-image stores are outperforming the overall comp. Do you have any colour on how much they're outperforming? and the plans for re-imaging for next year?

Absolutely, Jonathan. The outperformance is consistent with what we've described for the last couple of quarters, which is about five points better, 500 bps better in terms of comp outperformance. Related to the re-imaging plans, we've done about 140 stores so far for the year. We're going to do 10 in Q4, and that's largely due to the fact that we got a lot done in Q3 ahead of winter weather. A lot of our re-imaging occurs in the northeast, and it's outside work that can only be done as the weather gets better. So we'll go out west, finish up some stores out there that we need to re-image from recently acquired stores, and then come back in Q1 and be back on pace with what we announced as our pace going forward, which is about 80 stores a quarter as the execution rollout pays. So we're on track, and we feel good about our ability to have quickly ramped back up on this initiative post taking that pause in Q1.

Okay. So on the January comp improvement, I mean, in October the message was comps are kind of performing in line with vehicle miles traveled. Now you've had this big improvement in your labor capacity and productivity. Vehicle miles traveled continue to be pretty soft. I think they were down 11% or 12% for January last I looked. How would you characterize that 3% comp relative to the decline in macro trends we continue to see, and how sustainable would you consider that delta to be?

Sure. I think if you look at our performance in January and the improved performance we saw as we moved from November to December and then December into January being up three, I think you have to look at it through two lenses, one through our tire business and one through our service business. And the tire business, as we've talked about, we've been in line or outperformed the U.S. retail tire industry consistently during both Q2, as we discussed, and through Q3. And we saw the industry have general market conditions softer in October and November, and those market conditions improved in December and into January. And we performed in line with those improvements and outperformed those improvements slightly. If you look through the lens of our service business, what impacted the service business primarily in the quarter was, as we discussed in our prepared remarks, the onboarding of our new teammates. Our service business is heavily dependent on technicians' ability to perform in-store inspections on vehicles, identify needed work, and present that work to the store manager to be able to sell. And that takes time. time to get our technicians fully up to speed to support the sales. And that has impacted our service category sales. What we are happy about is our ability to have largely completed that onboarding and training task as we move through the quarter. And that really supported improvements in December and certainly supported even more improvement into January in our key service categories. And that underlying improvement in service has been key for our ability to achieve the 3% consolidated comp store sales improvement in January.

Okay, thanks. Just to circle up on that, could you give us the breakout of the monthly comps for Q3, please?

Absolutely. We were down 12% in October, 18% in November, 6% in December. And then, as we said, up 3% in January.

Okay, thanks. And on this discussion about potential new duties on tires from Southeast Asia, I know there's some uncertainty there on the exact policy timing and measures to be implemented. But if these were implemented, how would you – think of this as impacting your sales and gross profits over the year. I would think intuitively this could shift mixed to higher tier tires.

I appreciate the question. Amid ongoing macro concerns, including the global tariffs and other material cost pressures, we'll continue to leverage our vertically integrated and diversified supply chain, which drives our cost leadership position and and helps us remain a key differentiator in our industry. We have contingency plans in place regarding the potential tariffs in the region, and we expect our network of multiple supply points to mitigate the exposure. Lastly, any tire cost increase not mitigated by our differentiated supply chain, we're expected to be passed on to the consumers.

Okay, fair enough. I'll pass the line. Thank you. Thanks, Jonathan.

Our next question is from Brian Nagel with Oppenheimer and Company. Please proceed.

Hi, good morning. Good morning, Brian. So I have one, I guess, shorter financial question than a bigger picture question. In terms of the shorter financial question, Brian, you talked a lot about the puts and takes on the gross margin line. Clearly weak here in the fiscal third quarter. Recognizing you're not providing guidance. I mean, how should we think about just the trajectory gross margins going forward? You know, how some of those puts and takes might change. And then the second bigger picture question I have, you know, again, recognizing there's a lot going on here with regard to the COVID disruptions and even the management changes at Monroe. Where are we? Stepping back, where are we in the whole Monroe Forward initiative or turnaround repositioning effort? Thanks.

Yeah, thanks, Brian. Regarding the gross margins, obviously a relevant question and something that we highlighted in the prepared remarks because of the impact on the quarter. As we look at the real drivers of the quarter, it's probably helpful to look at those and then give a little bit of a forward-looking color on how improving top line and the current trends in our business could affect that in Q4 and beyond. The first is obviously the lower overall comparable store sales, down 13% in the quarter. It does put pressure on our fixed costs that reside in gross margin, distribution, and occupancy costs. And any improvement in that, and certainly comparable store sales increases, flip that because obviously we'll start to gain leverage on those fixed costs. So the current sales trends we're seeing in January, you know, if those continue, that could be a meaningful flip in our gross margin profile from a significant headwind with that fixed cost deleverage to fixed cost leverage on higher comparable store sales. And that's certainly what we expect as we move forward and drive top line improvements. The second piece is the mix to tires versus service categories, and that impacted our Q3. But with the improvement in our service categories in January, and we're not all the way there yet, we've got further improvement to make, and we expect to do that as we move through the quarter, we would expect that that headwind related to tire mix would start to abate as well. The good news is we are making strong variable margin improvements within our tire category related to the rollout of our category management and pricing tool. So while the mix has been running against us within the category, certainly we've seen positive results from the investment we made in that pricing tool. And then finally, as it relates to technician labor, we've already seen that trend turn. We saw it turn in December. and into January with labor costs as a percentage of sales decreasing in those months versus October and November. I expect that to continue as well. So I think it's all positive on the gross margin front, really driven by an improving top line, our mix improving as service improves, and the labor productivity issues in our rearview mirror. So I think that gross margin... looks much more positive than what we saw in Q3. And, you know, we're on our path to returning to what we've seen historically from that line on the P&L. As it relates to the second part of your question, Monroe, forward, you know, we really just completed two of our major initiatives related to the technology upgrades for labor and for our tire category management. And while we're seeing the benefits of those in our operations and in our P&L, we still have a lot more continuous improvement to drive in those initiatives. So we would expect that those continue to move us forward and gain returns on the investments we've made there. And obviously, we're still in early stages of our rollout of our store re-image. We've only re-imaged about 115 of our service stores into tire branded stores. And we've got a lot of runway, you know, 300, 400 stores there that still have the potential to be rebranded to tire stores and obviously drive outsized comparable store sales increases. So I think as it relates to Monroe Forward, while we're probably in the middle to later innings in terms of all of the work that we've done to position the company for the repositioning, as you call it, We are in the early innings of having seen the benefit of all of that work in our results, and I think that is one of the reasons why we have confidence, as Rob mentioned, moving forward in our business in Q4 and beyond, because we know the return on the significant investments we've made is still not yet fully reflected in our results, and we're confident that it will be.

That's great. Very helpful. Thank you. Yeah. Thanks, Brian.

Our next question is from Brett Jordan with Jefferies. Please proceed.

Hey. Good morning, guys. Hi, Brett. Morning, Brett. Good morning, Brett. Could you give us, I guess, some color on regional performance, you know, the Western stores versus South and Northeast? And I guess in the sense that you get the benefit of, through some of your NDAs, some competitive information, could you talk about where you see either better or worse market share comparisons?

Yeah, sure, Brett. Appreciate the question. If we look at the West, first of all, the West isn't included in our comps, but they're performing consistent with our expectations and posting strong earnings. If you look at the October, November, the Northeast and Midwest had a dip due to tire seasonality, but had an uptick in December and January. as the seasonality reversed. In the south, really performed similarly in all service categories, with the exception of tires that didn't have the seasonality. So all the markets across the portfolio performed similarly on the service categories, the only difference really being in the tire categories due to seasonality.

Yeah, and so on a consolidated basis, you know, if you roll up all the category dynamics, our southern region, you know, outperformed the northeast and midwest by about five points in the quarter. That gap was wider, as Rob mentioned, because of the tire dynamics in the first part of the quarter in October and November, and it narrowed to be more consistent among all the regions in December and January. as business in the Northeast and Midwest picked up with the supporting tire general market conditions. As it relates to NDAs or other information that we have, you know, we talked a little bit about the tire industry and our, you know, kind of meeting or exceeding the performance of the U.S. tire retail industry. And that information is really an accumulation of smaller and mid-tier chains across the country, and we cross-section that to our regions to see how we're performing. So we feel on the tire side, like we said, we are consistent. As it relates to service, I think as we talked about, we had some Monroe-specific challenges related to labor, which probably put us a little bit of a disadvantage early in the quarter. With those issues clearly in our rearview mirror, we feel good that we're performing On the service side of the business, also, you know, add or near where peers are, especially as we have moved into January.

Okay, great. And then one question, I think you mentioned a couple times some rent or lease concessions in the quarter. Is that an expense that is going to come back? Would you owe or did you basically negotiate that you will pay any of these concessions back as it results improve or is this sort of a permanent cost reduction?

No, I think the ones that I'm talking about that make their way into our P&L are primarily related to renegotiations of our lease. We've extended some terms. In exchange for those extended terms, we were able to get lower renewal rates and a decrease in the rent in the current term. So overall, we still expect that we'll have lower rent expense structurally throughout the period of the renegotiation.

Okay, great. And then one final question, I guess, and not to get too granular on the cadence of comps, but could you talk about January, given the fact we're almost through the month, the plus three? Has it continued to improve as the month has gone on, or have you seen variability within that plus three?

You know, without getting into a weekly blow-by-blow, We can do daily. Yeah, right. I'm sure you'd like that, Brett. We basically would say we've seen just continued strength from November to December and December into January. That January number is our full fiscal January, which closed on January 23rd this past Saturday. So through this past Saturday, we put a plus 3% in the books. Obviously, our first comp increase since the COVID-19 pandemic began. So, you know, we're extremely encouraged with that performance and gives us confidence that, you know, we did the right things to manage the business through the pandemic, and we're doing the right things now to manage the business as demand has returned. Great. Thank you. Thanks, Brad.

Our next question is from Rick Nelson with Stevens Inc. Please proceed.

Thanks. Good morning. So you talked about technician productivity improvements. I'm curious, are we back to normalized efficiency levels, or is that still something that we need to push forward with? I guess when do you think we will be at normalized level if we're not there today? Okay.

Rick, thanks. Appreciate the question. While we are pleased with the current trends and improvement in our productivity, we certainly have a continuous improvement mindset and will continue to work hard to improve the current performance moving forward. As the 700-plus new technicians have been trained, we have seen growth across all the categories in our margin performance and productivity and look and encourage to see that continue as we move forward.

Is there a same-store sales level that you need to achieve to leverage operating expenses? You know, this January plus three, are you, in fact, levering operating expense?

Absolutely. I mean, if you look at our quarter, Rick, we were down 13% in comparable store sales, and our SG&A as a percentage of sales went from 28.2 to 28.3. So then that was driven by a $12 million reduction in our operating expenses. So, you know, we've positioned the cost structure of the business to have significant leverage on top line, you know, even probably at a break-even or slightly down comp. So a plus three in January will will drive leverage against our new lower fixed cost structure. I did talk about the cost reductions being $10 million in the Q3 and only $5 million in Q4, and that's really because in Q3, in reaction to the lower comps, you know, we did a really good job of managing our costs to the lower top line. As we expect, you know, with January plus three, a higher Q4 performance I've put back $5 million of that cost reduction, which we believe will be needed to support that top line. But still, $5 million lower than last year puts us at a pretty low leverage point from a fixed cost standpoint.

Great. And finally, on the M&A front, you talked about the pipeline. Is this a situation where you're focused on the core business right now to get that improved and taking a break on acquisitions. And if you could speak to pricing on acquisitions, the multiples. Thanks.

Absolutely. Acquisitions are a strategic and key component of our growth strategy. And they continue to be. And there is, you know, we have a robust pipeline of acquisitions that we feel are very actionable and very much in our core wheelhouse and competencies to be able to execute them in an accretive and beneficial way for our business. So I do not think that we need to make the either or choice. And I think that's evidenced by the fact that we closed on the Allen tire deal in early December. And, you know, despite having executed on that transaction, we still are seeing the improved trends in December and into January. So that deal does not look like it had any negative impact on our ability to continue to improve our business and manage our business day to day. We've got adequate resources to action on our acquisitions and operate our business and improve our business. And our intention is to continue to do that. We think that's the most meaningful driver for creating long-term shareholder value. As it relates to multiples, we don't comment on those for competitive reasons, obviously, but we are seeing consistent multiples and consistent expectations of sellers with what we have seen historically, and I think that there's nothing that I see that's causing any of that to change in the near term.

Great. Thanks a lot, and good luck.

Thanks, Rick. Thanks, Rick.

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

Hey, thanks for taking the question here. So you made it clear that labor had a meaningful impact in October and November. So now that you've fully ramped up staffing, is there any way to quantify the level of sales you missed out on in quarter one Could comparable sales tracks call it down mid to high single digits excluding any of these labor impacts?

Yeah, I think that as I talked about earlier, you really look at it through the two lenses of the tire dynamic really driven by the general market conditions and the service dynamic really driven by the labor dynamics. And as we look at exiting Q3, and into Q4, we have more typical general market conditions, particularly in the Northeast, that are more comparable to the prior year, whereas earlier in the quarter they were weaker than the prior year. And we have labor dynamics in our stores that are as good or even better than the prior year in terms of our ability to support growth in our service categories. So To quantify the specifics of where the headwinds were throughout the quarter is probably not as useful as saying that our positioning in both those areas in January are on much better footing. And if general macroeconomic conditions and general market conditions hold, then we would expect that our trend in January is much more indicative of where we expect the rest of the quarter to be versus the trends that we saw, you know, in the early part of Q3.

Okay, gotcha. And this might follow up. Did you see any significant change in the average ticket trends, especially as you move through the quarter, as in any normal seasonality within the tire category? And are you seeing consumers more willing to spend and maybe engage in more full repairs or higher-end brands now?

Yeah, our results – you know, throughout the pandemic and certainly in Q3, we're led by ticket versus traffic. And, you know, I think it's pretty typical right now where we've seen higher tickets and a little bit more pressure on traffic given the nature of miles driven and where we're at, you know, globally here. So that is helped by a mixing towards tires, but we're also seeing, you know, good ticket out of our out of our service category as well. But that ticket and service got better as the quarter went on, and that's a result of the investments and the training that we did on the labor side. Thank you.

Our next question is from Stephanie Benjamin with Truist. Please proceed. Hi, good morning.

Thank you for the question.

Thank you. Good morning. Hi, Stephanie.

Not to kind of beat a dead horse here, but I'm a little curious, you know, as we look at the monthly performance in the quarter and the pretty meaningful drop-off that you saw in November, I'm just trying to get a sense, you know, when we last spoke at the end of October and you gave the October number, you know, it was very much kind of a direct, you know, it was pretty much tracking in line with vehicle miles driven and And I'm just trying to get an understanding of, you know, when we saw that, you know, pretty steep decline in November, what was going on? I mean, can you give a little bit of color on what the tire category did in November? I'm just trying to get a sense of, obviously, this is a pretty tumultuous time. And, you know, with COVID was in front and center in November. And, you know, as we're improving forward, I'm just trying to think through, as you did see nice improvement in December and January, how much of that was due to maybe, you know, a pullback in November or, you know, are we out of the woods yet? So maybe any kind of category difference you can give or what you think caused such a decline in that November month would be helpful.

Yeah, absolutely. A great question. In November, down 18 was really driven by the tire category. And it was really driven by a tire category in the northeast and in the midwest. But yet, even though we were down significantly in that tire category, we still were at or above the U.S. retail industry. So it was an industry phenomenon really driven by soft market conditions, really driven by mild weather in the Northeast and in the Midwest compared to the prior year, November. So we certainly were disappointed by the weakness that we saw. saw but encouraged by the fact that we drove, you know, consistent and outsized performance in our tire category while also continuing, as we talked about in the prepared remarks, to expand our gross profit per tire, which ended up being up 5% in the quarter, even though demand was softer earlier on, particularly in November.

Got it. Thank you. And last question for me. I think, you know, across the board we're hearing that there's a lot of just kind of supply chain constraints and just inability to, you know, get needed automotive parts. You know, the headlines have obviously been very strong on semiconductors and other parts. You know, has there been any issue from a tire standpoint, procurement, and just being able to have the inventory to meet any potential, you know, reacceleration demands?

Stephanie, thanks. Appreciate the question. For us, with our diversified supply chain, we really haven't felt any effects. We've been able to get product and source product from our various vendors. And we do have contingency plans in place if that happens to change. With our network of multiple supply points to mitigate our exposure, we haven't felt any ill effects at this point.

Great. Thank you so much.

Thanks. As a reminder to star one on your telephone keypad if you would like to ask a question. Our next question is from Scott Stember with CL King and Associates. Please proceed.

Good morning, guys, and thanks for taking my questions.

Morning, Scott.

Morning, Scott.

Just looking at the recovery that we've seen in December and into January, it seems like, based off your comments, a lot of it has to do with tires. And is it fair to assume that everything across the board, all the other segments are up as well in the month of January, or is this more of a tire dynamic that we're seeing?

Yeah, Scott, as we talked about earlier, earlier, there really is two lenses to it. Tires is certainly benefiting as we move from November to December and into January by the firming of the general market conditions in the tire category. And we've maintained and outperformed that market in the U.S. industry retail units. As it relates to the service side, that's really improving because of the better productivity of the technicians that we've onboarded in the quarter. And both those dynamics are contributing to the improvement we've seen over the last three months and into January. It's fair to say that we've seen improvements in all of our service categories and also in tires. I'm not saying that every single category is comp positive, but I'm saying that every single category is contributing to the improved trend that we're seeing. Yeah, Brian.

You know, with your taking tires out of the equation, I guess if you're looking at the service side of the business, there's more, I guess, cyclicality or more of a reliance on the underlying markets as well. Can you talk about, you know, your confidence that, you know, in a very tough situation, job market and with a lot of your customers in your market still being under significant pressure that we won't see some kind of, I don't know, you know, pullback in demand in the next couple of months? Are you pretty confident that what you're seeing at the store level with your technicians and the improved utilization that that should help you continue to move forward?

Yeah, I think as it relates to that, Scott, you know, I think that we are, what we've accomplished in the quarter at the end of the day is that we've gotten our ability, we've gotten our capacity much closer to demand. So we had a gap in the early part of the quarter between our ability to service the demand and the demand that was there. And now as we've moved into January, we've moved our ability to service that demand right up to the level of the demand. And so we certainly will be affected more as we move forward by variations in that demand. But we are constructive on the trends that we're seeing in vehicle miles traveled. We're obviously encouraged by the vaccinations that are rolling out. And while I'm not going to wager a guess on the full behavior of the consumer or of vehicle miles traveled, we think that it's a net uptrend in terms of what that means for our business. So that gives us confidence as we move forward. And obviously, we are hopeful that we still see a firm tire business and tire industry as we move forward, particularly as we exit the rest of the fourth quarter.

Got it. And then last question, just a bigger picture, you know, every few quarters or so, the topic comes up about, you know, exposure to weather and how that can, you know, drive your business, you know, positively or negatively. Where do you stand right now in your view of, you know, the seasonality of your business from, again, tires typically if there's, like we saw in October and November, if we don't get weather business craters and then it can come back a couple months later. Is there anything you guys can do to kind of, or if you're doing it early, to try to smooth out, you know, this volatility?

You know, I think, you know, we can't move our stores, unfortunately. And we do have exposure to the Northeast and the Midwest, which are affected by seasonal changes. And we see that in the trends of the U.S. tiger retail industry. And being part of that industry, our trends are correlated to that. But we do have initiatives underway to continue to stimulate tire demand. And regardless of the macro backdrop, we want to outperform and take our share of the industry forward. And with the fragmentation of the industry, we feel we have an opportunity to take share and not rely just on the industry going up or down as seasonality changes. And we also think it's important as we acquire stores to continue to acquire in the geographies that we have been, which has been concentrated in the southeast and on the west coast, which helps to diversify our business away from northeast tire demand. So we're doing what we can there, but in the short term, we're still going to be influenced by weather dynamics. Got it.

That's all I have. Thank you.

Thanks, Scott. Thanks, Scott.

This does conclude our question and answer session. I would like to turn the call back over to management for closing remarks.

Well, I just want to say thank you for joining us today and for your continued interest and support of Monroe. We look forward to providing you with an update on our progress next quarter. We all hope you have a safe and great day. Bye-bye.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.