1/26/2022

speaker
Operator

Good morning ladies and gentlemen and welcome to Monroe, Inc's earnings conference call for the third quarter of fiscal 2022. 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. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. As a reminder ladies and gentlemen, This conference 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 Wechsler, Senior Director of Investor Relations at Monroe. Please go ahead, sir.

speaker
Felix Wechsler

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 investor section of our website at corporate.monroe.com. forward slash investors, forward slash investor resources. If I could draw your attention to the safe harbor statement on slide two, I'd like to remind participants that our presentation includes some forward-looking statements about Monroe'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 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 and not be substitutes for comparable gap measures. Reconciliations of such supplemental information to the comparable gap measures will be included as part of today's presentation in an earnings release. With that, I'd like to turn the call over to Monroe's President and Chief Executive Officer, Mike Broderick.

speaker
Monroe

Thank you, Felix, and good morning, everyone. Thanks for joining us. Let me start off by saying that our Monroe Forward Strategy and the meaningful investments we are making are driving significant change. We are on a journey to transform this great organization and unleash its full potential. Our accomplishments in the third quarter indicate clear progress towards the achievement of our transformational goals. As highlighted on slides three and four, we delivered another solid quarter and continued our momentum from the first half of the fiscal year. Q3 marks our third consecutive quarter of double-digit comparable store sales growth. Top line performance also exceeded pre-pandemic sales levels for the third straight quarter. We once again posted double-digit comp sales growth across all of our regions and categories. Our comp sales growth was led by our key break and alignment service categories, both of which grew 28% in the quarter. We are confident that normal fall and winter weather in the Northeast would have more positively impacted our tire category, which would have helped us to deliver an even stronger top line result. Encouragingly, tire unit sales were in line with the industry trends and variable gross profit per tire increased 9% year over year. The overall strength of our sales in the third quarter reflects robust demand for our product and service categories, as well as the quality of our execution and the continued traction of our Monroe Forward strategy. We continue to increase the mix of our higher margin service sales, which contributed to the improvement in gross margin during the quarter. I will discuss the specific progress we made in the critical area of staffing in just a few moments. I do want to highlight that in the third quarter, we saw higher technician payroll costs as a percentage of sales. This was largely driven by incremental investments to increase the quantity and strengthen the quality of technicians in our stores. The investments in technician staffing were critical to delivering improved top-line performance in the quarter. We were staffed and ready for winter and believed top-line performance would have been even higher with a more normal weather backdrop. As I will discuss in greater detail, we will continue to increase our technician staffing levels and ensure that we have the right mix of trained technicians in each of our stores. We are fully committed to building a best-in-class service model that our customers can rely on for their car care needs. Capitalizing on robust industry demand and multi-year industry tailwinds, this service model will position us for outsized sales and earnings growth. Moving to our fourth quarter, our preliminary fiscal January comparable store sales increased 1% compared to fiscal January of last year, and we're 4% above pre-COVID levels. Our incremental staffing has allowed us to manage through a particularly difficult six weeks, with COVID-related absences increasing significantly in our stores. Our higher staffing levels have allowed us to keep our stores open and our hours of operations normal. We expect that once this COVID wave has passed, our teammates will once again be fully focused on delivering top line growth. I'd like to use this as an opportunity to discuss the true impact of COVID on our business. We've incurred incremental expenses necessary to keep our teammates, customers, and community safe. These expenses include items such as personal protective equipment, hand sanitizer, and retrofitting our stores to allow for appropriate social distancing. Due to the service-based nature of our business, the largest impact of the pandemic has been on our teammates. COVID has required a high level of resiliency and flexibility from the teammates in our retail, commercial, and wholesale locations, as well as those in our distribution centers and store support center. We've experienced substantial disruption to our store operations throughout the pandemic, and we have always treated the costs associated with this disruption as part of our normal operating results. These include appropriate investments and necessary adjustments to our in-store procedures and business operations. We recognize COVID as a significant challenge for us to overcome, and we believe we are making meaningful progress. Leveraging the collective experience of our senior leadership team, we have driven double digit top line growth, expanded margins, significantly grown earnings per share, and generated significant amounts of cash. We have done all this while also completing value creating acquisitions and positioning our business for the future. I would be remiss if I didn't use this as an opportunity to recognize all of our teammates across the country for the incredible job they have done taking care of our customers' needs and providing stability to our business. Our people are our most important asset, and I am proud and grateful for their perseverance and unwavering dedication to Monroe and our customers. Now let's talk about the progress we made on our operational execution in the third quarter. Moving on to slide five, I'd like to update you on the critical in-store initiatives we refer to as our Big Five, as well as our store re-image program. As a reminder, our Big Five are the key areas of staffing, scheduling, training, attachment selling, and outside purchase management. These initiatives, along with the investments we are making to support them, are the single best path to sustainable comp sales growth and are expected to lead to improvements in gross profit and operating margins. And ultimately, these improvements allow us to create additional value for our shareholders through enhanced earning per share, significant cash generation, and higher returns on invested capital. Starting with the first two, which are staffing and scheduling, in the third quarter, we added over 200 high-quality net new technicians. This is incremental. to the more than 250 technicians we added in the prior quarter. Embedded within our net new technician ads is a sequential improvement in turnover of approximately 10% between the second and third quarter. This is a significant accomplishment for two reasons. First, the fact that we are adding technician headcount during the historically tight labor market demonstrates that we are progressing towards our goal of becoming the employer of choice in the auto service aftermarket industry. And second, the investments we are making in labor, particularly in our low-volume stores, represents both an important organizational pivot and essential cultural change at Monroe. Let me provide some additional context to this pivot and why this cultural change represents a critical component of Monroe's future success. Many of our stores are understaffed with some technicians working upwards of 70 hours per week with little to no time off. Amongst other things, this leads to unwanted turnover of experienced technicians. The turnover of these technicians leads to stores that are further understaffed and a customer experience that is inconsistent and far from desirable. This results in lower sales and is a key contributor to inconsistent operating performance. The investments we are making in labor are specifically aimed at addressing and resolving these issues and ensuring a more sustainable business model longer term. This is exactly the pivot and cultural change that we must undertake to assure that we can capitalize on incremental sales opportunities that will ultimately bring more consistency to our operating results. Nothing will deter us from continuing to invest in high-quality labor in our stores as we develop a reliable service model that our customers can count on and trust. This will position us to take disproportionate gains in the future as our business will be better equipped to capitalize on customer demand from multi-year tailwinds, such as an improvement in vehicle miles traveled and consumers that are holding on to their cars longer. In lockstep with our additions to in-store labor, we are also utilizing our scheduling tool to manage and control variability in labor costs so that we can match capacity with demand. and allocate resources appropriately between front of shop and back of shop activities. Our focus on staffing and scheduling resulted in a 24% sequential reduction in overtime hours in the third quarter. This reduction, along with our pricing power, allowed us to significantly offset wage pressures. Next, regarding training, we continue to significantly expand our team-made training through our online Learning Management System, Monroe University, as well as instructor-led sessions held virtually and hands-on developments done in store. Serving as a key enabler of future growth, training has been embedded in every aspect of our other initiatives, which will ensure we have the right skill set to deliver a best-in-class service model. The next item is attachment selling. Attachment selling was a critical factor in driving our comp sales growth in the third quarter. Our comp sales performance in alignments during the quarter is a great example of the headway we are making in this area. Alignment comp sales grew approximately two and a half times more than our tire category. This clearly shows how our store teams are more consistently recommending alignments to our guests, purchasing new tires, and is another example of our improving in-store execution. In addition, courtesy inspections on our customer vehicles were also critical in driving outperformance in our service categories during the quarter. We look forward to providing more insight into the benefits of our courtesy inspections as we continue to make opportunistic investments in this important area of the business. And lastly, on outside purchase management, we are consolidating our purchasing behind our high quality, high availability, low cost preferred suppliers to gain important economies of scale. This allows us to build strong partnerships with fewer suppliers. This consolidation, along with our pricing power and category management, has allowed us to significantly offset cost pressures in tires and parts. While our focus is on the Big Five initiatives, we made important advancements in our store re-image program. We initiated and substantially completed the re-image of 53 of our recently acquired stores on the West Coast in the third quarter. Most of these stores have now been equipped with our consistent approach to merchandising as well as marketing and branding elements such as new digital signage. This new digital signage displays various promotions and seasonal messages with the objective of conveying a modernized look and feel to the in-store experience for our customers. In addition, improvements such as upgraded service pods, the installation of new flooring and brighter lighting, more comfortable waiting room chairs, as well as the bathroom renovations have also created a more inviting guest experience. And while still early, we are pleased with our customer's initial response to this program. We are in the process of finalizing a full review of our portfolio of brands. And once complete, we intend to expand our store re-image program to a broader number of stores across the country. We're also continuing to perform a review of the inventory stocking plan needed to support any store-level brand changes. Turning to slide six, our strong cash flow and balance sheet continues to position us to capitalize on strategic and value-enhancing consolidation opportunities in our fragmented industry. As part of our growth strategy, we are and will continue to be a key acquirer of successful businesses. In the third quarter, we completed the previously announced acquisitions of 17 stores with six stores added in Southern California and 11 in Iowa. As a reminder, these stores are expected to add annualized sales of approximately $25 million and further expands our geographic reach. This brings our year-to-date acquisition total to 47 stores with expected annualized sales of $70 million. Next, I'd like to provide an update on our corporate responsibility and ESG efforts. In keeping with the Monroe Ford Responsibly report that we issued last year, we are continuing to integrate elements of ESG into all facets of our business. Demonstrating the fundamental importance of these efforts, our board of directors has been engaged with us as we work to establish measurable ESG goals that not only create value for our shareholders, but also hold us accountable to our teammates, customers, and the communities where we do business. Additionally, we have been meeting with investors to take in valuable feedback as we actively incorporate ESG initiatives as a regular part of our operations and further increase the transparency of future disclosures. And while we are still formalizing our plan, some examples of ESG topics that we look forward to updating you on in the future quarters and in our next corporate responsibility report include our approach to human capital, supply chain, and other assessments, and vital enhancements being made to our customer experience. In summary, we have made significant progress this quarter as we continue to drive top-line growth and margin improvement. This ultimately enhances our earnings potential and provides higher returns on invested capital. As shown on slide seven, we are committed to the highest standards of operational excellence that will enable a virtuous cycle of earnings growth and cash flow generation, allowing us to continue investing in value-enhancing acquisitions. We will continue to build a strong, scalable platform for long-term sustainable growth. Looking ahead, our focus remains on our teammates, customers, and in-store execution, as the critical drivers to realizing the full potential of our Monroe Forward strategy. Our leadership team and our teammates are aligned with our vision. They are energized by our mission of being a best-in-class, service-first organization that prioritizes its customers and the communities it serves. Together, we are keenly focused on bringing customers the professionalism and high-quality service they expect from a national retailer, with the convenience and trust of a neighborhood garage. This focus will maximize the value that we can create for our customers and all of our stakeholders. With that, I'll now turn the call over to Brian, who will provide an overview of Monroe's third quarter performance and strong financial position. Brian.

speaker
Felix

Thank you, Mike, and good morning, everyone. Let me take a few minutes to talk about our third quarter performance and the meaningful progress we made in the quarter. Turning to slide eight, sales increased 20.1% year over year, to $341.8 million in the third quarter, up approximately 4% compared to pre-COVID levels in fiscal 2020. Same-store sales increased 13.8%, driven by broad-based strength across all product and service categories. Sales from new stores increased by $18.5 million, primarily from recent acquisitions. Gross margin increased 150 basis points from the prior year, to 35.3%, accelerating from the 140 basis point improvement in the second quarter. The year-over-year increase was due to higher comparable store sales, which resulted in lower fixed distribution and occupancy costs as a percentage of sales. Also contributing was a higher sales mix of service categories compared to the prior year period. Variable gross profit was positively impacted by a 9% year-over-year increase in gross profit per tire, reflecting the ongoing benefits of our tire category management and pricing tool. We made an incremental investment in technician payroll costs to support current and future top line growth amidst improving consumer demand trends for our product and service categories. We estimate that this incremental investment in technician payroll, which approximated $5 million, impacted gross margin by 150 basis points in the quarter. As a reminder, we were staffed for a more supportive weather backdrop, which we believe would have resulted in higher sales. We continue to execute disciplined cost controls with total operating expenses of $93.1 million or 27.3% of sales as compared to $80.5 million or 28.3% of sales in the prior year period. The dollar increase is due to higher store management payroll and store operating expenses in the quarter to support strong consumer demand. The remaining dollar increase was from the expenses of 43 net new stores. Operating income for the third quarter grew substantially to $27.4 million or 8% of sales as compared to $15.7 million or 5.5% of sales in the prior year period. Net interest expense decreased to $5.7 million as compared to $6.8 million in the same period last year. This was principally due to a decrease in weighted average debt. Income tax expense was $5.5 million at a tax rate of 25.3% compared to $2.3 million at a tax rate of 25.2% in the prior year period. Net income was $16.3 million as compared to $6.7 million in the same period last year. Diluted earnings per share was 48 cents compared to 20 cents for the same period last year. Adjusted diluted earnings per share, a non-GAAP measure, was 49 cents in the quarter and excluded 1 cent per share of costs related to our Monroe Forward initiatives. This compares to adjusted diluted earnings per share of 22 cents for the same period last year, which excluded 2 cents per share of costs related to our Monroe Forward initiatives and a benefit related to the reversal of a reserve for potential litigation. As highlighted on slide 9, we continue to maintain a solid financial position to support our operations and enable the execution of our long-term growth strategy. We generated $127 million of cash from operations during the first nine months of fiscal 2022. We maintained our measured approach to capital allocation and invested $17 million in capital expenditures, paid $83 million for acquisitions, and spent $29 million in principal payments for financing leases. Additionally, we distributed $26 million in dividends. Our balance sheet and liquidity position remained strong. At the end of the third quarter, we had net bank debt of $185 million and a net bank debt to EBITDA ratio of one time. We ended the quarter with cash and cash equivalents of $9.5 million in availability under our revolving credit facility of $375 million. Last quarter, we amended our credit agreement primarily to reduce our LIBOR interest floor from 0.75% to 0%. We continue to expect that this will contribute $1 million in annualized interest expense savings at current debt levels. As we progress through the fourth quarter of fiscal 2022, we remain committed to comp sales growth, margin expansion, and significant cash creation. First, we plan to continue executing operational enhancements across our business to grow sales and expand margins. These efforts will drive growth in EBITDA and increase cash flow generation. In addition, we remain focused on working capital improvements, and we believe we have additional opportunities in this area. Specifically, we are focused on improving our cash conversion cycle with an emphasis on inventory and payables. Turning to our outlook on slide 10, the COVID-19 situation remains fluid, which makes it difficult to accurately forecast the impact of the ongoing pandemic on our future operations. While we are not providing formal guidance for the remainder of fiscal 2022, we remain optimistic given our third quarter momentum and the positive trends in the business. In addition, we provided some financial assumptions to assist you with your modeling. We expect tire and oil costs to continue to increase year over year. Considering the inflationary environment, we will continue to optimize our supply chain, leverage our strong strategic partnerships, and capitalize on our cost leadership position. We have a long history of managing the business successfully through periods of inflation. And to reiterate, we will continue to invest in high quality labor in our stores as we develop a reliable service model. As we make these investments, we expect gross margin improvement in the fourth quarter versus prior year as our service category sales strengthen. Lastly, regarding our capital expenditures, we expect to spend approximately $30 to $40 million in fiscal 2022. And with that, I will now turn the call back over to Mike for some closing remarks.

speaker
Monroe

Thanks, Brian. We're encouraged by our solid performance in the third quarter and optimistic about the outlook of our business for the fiscal fourth quarter and beyond. Overall, we remain well positioned to capitalize on strong demand while having the financial flexibility to execute our growth strategy and deliver long-term value creation for our shareholders. With that, I will now turn the call over to the operator for questions.

speaker
Operator

Thank you. At this time, we'll be conducting a question and answer session. If you'd 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'd 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. In the interest of time, we ask that you each keep to one question and one follow-up.

speaker
Stephanie

We'll pause a moment to pull for questions.

speaker
Operator

Thank you. Our first question comes from the line of Jonathan Lammers with BMO Capital Markets. Please proceed with your question.

speaker
Jonathan Lammers

Good morning. Good morning.

speaker
spk07

So thanks for all the comments on labor and your efforts to increased capacity. Sequentially, did the need for overtime hours increase from Q2 into Q3 and into January?

speaker
Monroe

That's a good question because I'm very proud of the work that the team has done. I would say we addressed overtime. It was one of the big margin when we looked at the quality of our teammates and we looked at really addressing our turnover our retention initiatives and really our people initiatives. We looked at overtime as not only an opportunity for our financials, improving our financials, but also how do we improve our business model. So when I look at the overtime, I'm very happy with the 24% reduction. Where we did invest, we did invest additional, obviously we spent on overtime when we were managing really the people agenda as people were dealing with sickness and we definitely saw that over the last six weeks. we were still investing in overtime. So when I look at our performance, 24% improvement, I do feel like we still invested in overtime. We could have actually seen actually better results, and obviously that would have, if we didn't have this new pandemic or the COVID wave upon us.

speaker
spk07

Okay, and just to follow up on that, that 24% reduction, that's versus prior year? Versus Q2. And thanks. And just Brian, is that this is all separate from the investment that was made in payroll costs. And what do you expect that that will reduce overtime further going forward as the pandemic recedes?

speaker
Felix

Yeah, Jonathan, as we continue to invest in the high quality technicians in our stores, we would expect to continue to see overtime come down. And as Mike said, over the last six weeks, I think we would have seen you know, an even further reduction in overtime than we saw. But we did augment our store staffing with overtime just to really manage and get through the COVID-related absences that we saw spike over the last period of time. But on the other side of that wave, we'll continue to see the trend as we add labor.

speaker
Jonathan Lammers

Okay, I'll pass the line. Thank you. Thank you.

speaker
Operator

Thank you. Our next question comes from the line of Brett Jordan with Jefferies. Please proceed with your question.

speaker
Jordan

Hey, good morning, guys. Good morning, Brett.

speaker
Jonathan Lammers

Good morning, Brett.

speaker
Jordan

Could you talk about the impact of price versus traffic in the comp in the quarter as well as January?

speaker
Felix

Yeah, the comp sale was led by ticket, as it has been. We're seeing, you know, kind of better traffic trends, particularly year over year. but it was led by Ticket, and that has continued into the quarter. Our team has done a really good job of executing in-store when the guest comes in with recommending other needed work, and that's really done through our courtesy inspection. But you need the staffing in-store to be able to do that and the training and the attachment selling. So all of that's really, I think, coming to life in that in-store selling, and that's helping to support improvements in Ticket And that staffing ultimately, we believe, will be supportive of our traffic trends going forward.

speaker
Jordan

Okay. Since I only get two questions, I'm going to put two of them into the second one. But could you give us the housekeeping numbers on monthly comp for the quarter as well as maybe some regional performance spread between west, southeast, northeast?

speaker
Felix

Yeah. We laid out on slide four the monthly comps, but it was 13.8 in October, 17.5 in November, and 9 in December. And then, and geographically, you know, we saw double-digit comps across all of our regions year over year. But, you know, we did see a little bit outperformance in, you know, the west and in the north a little bit only because of, you know, they're still coming out of more difficult year over year comparisons.

speaker
Jordan

Okay. Because your comment about weather impact, I would have expected maybe underperformance in the northern markets. Was it not? Was the weather not enough to offset what was an easy year-over-year compare?

speaker
Felix

Exactly, exactly. I do think, though, if you look at across our regions, we saw really good performance out of our break in alignment categories, and that really helped to support the top line and us to really deliver the expectation on the top line, at least the external expectation. Our internal was that with the right weather setup that would have been a normal weather setup, tires in the northeast would have would have come to life more than they did, and that would have allowed us, as we talked about, an even higher top line.

speaker
Jordan

Okay, so if there was a category in the December quarter that you sort of felt less strong, it was tires related to weather?

speaker
Jonathan Lammers

Yes, that's right. Okay, great. Thank you. Thank you.

speaker
Operator

Thank you. Our next question comes from Brian Nagel with Oppenheimer. Please proceed with the question.

speaker
Brian Nagel

Hi, good morning. Good morning, Brian. I apologize. My question is a bit of a follow-up in short-term nature, but I want to understand better. Just in response to Brett's question a moment ago, you talked about the monthly cadence through the fiscal third quarter, then into the fourth quarter of January. The slowdown, going from what was high single-digit, if not double-digit, to 1%, is that weather, or is there some other factor at play? And then if you look at the balance, recognize you're not given guidance for it. balance of fiscal year, but how should we think about the puts and takes with regard to sales over the next, say, several weeks or a couple months, whatever?

speaker
Monroe

Yeah, I'll take that, and obviously, Brian, you can add on. But I would say looking at the December, we were going to get some more difficult comp. Now, we definitely staffed, and we had an expectation for the tire category that we would have had a very strong quarter, a very strong December. The good news is we're still able to deliver a very strong service comp coming out of December. Now, when you look at the January, you know, we're competing with stimulus dollars in the first couple of weeks, but when you look at the two-year comp, it's one of our strongest two-year comps, a one-on-three. And then last but not least, I want to bring to your attention that the team did this all without us really doing any promotional activity. So when I look at the 9% gross profit on a tire category, we really, really stuck to the position of, hey, look, we're going to staff our stores, we're going to develop a very strong retail service organization, and we're going to just be very rational as a competitor in the marketplace so that we can manage the demand for the long term.

speaker
Brian Nagel

Okay, got it. And then as a follow-up, I guess maybe we can take a step, still with regard to sales, but stepping back. I mean, everyone we're talking to, the environment's very, very fluid out there. But as you look at just the underlying, you know, demand trends within your stores, I mean, clearly, you know, you have made significant progress in improving your operations. So that's helping you to connect better with your consumers. But the real question was, how do you view this, I want to call it like this, you know, this tailwind as the economy has started to, you know, started to move away from the COVID crisis? You know, then people are getting miles driven, starting to take up again. I mean, is that still a tailwind for your business? I mean, to what extent and how long should that last?

speaker
Monroe

Yeah. So I don't know exactly the timing, but I'll, I'll take, I absolutely view that as our tailwind in our business. So what we're doing in the third quarter is really, um, I would say we started in the second quarter, really starting to talk about the investments in our people. Uh, we talked about staffing, scheduling and training, and we're getting ready for, I would say the tailwinds in the industry, uh, for the service categories. Um, it's not just tires breaks, but it's as people get back on the road, the failure, that it's going to be more, it's going to be broader than just tires and brakes and oil change. It's going to be under hood, check engine light. These are all things that we're bringing to the marketplace, new categories that we're going to really emphasize on. What that takes, though, is making sure that we have a qualified service organization to be able to take care of the cars in the markets that we serve. So, yes, we're actually building an organization really for what we see as a significant tailwind to this industry.

speaker
Jonathan Lammers

I appreciate it. Thank you. Thank you.

speaker
Operator

Thank you. Our next question comes from the line of Rick Nelson with Steven Zink. Please proceed with your question.

speaker
Rick Nelson

Brian, I'd like to follow up on this tech payroll gross margin headwind. How long do you think this step-up period of investment is going to be needed? And as we think about gross margin for next year, do you think tech payroll is a bigger percent of sales in fiscal 23?

speaker
Monroe

Good morning, Rick. I would say that anything I tell you, it's like a limiter on the investment. I will hire right now all qualified technicians and I'll find a position for them in our stores. So I would say the investment thesis is and the focus on driving service categories and making sure that we're ready to be able to take care of the customers that are going to need us, that's going to be something that we're going to continue to focus on. Now, we do have a plan by store. But remember, as we drive these service categories, it's a higher margin business. We've talked about a 70 margin compared to a tire category that does a 40 margin. So we do believe these investments are going to be accretive on the margin side as well as on the top line.

speaker
Rick Nelson

Great. Good to hear. I'm curious also, you know, where you're able to pass through the wage investments the best as we look at your sales categories. You know, where is it the easiest and maybe where things stick here?

speaker
Monroe

No, that's a great question, Rick. And I'll divide it in two different categories. First and foremost, tires being the most of the cost increases on tires, we actually flow through. We're a rational competitor. We do the necessary price scrapes so that we stay competitive in the marketplace. When our in this industry, The suppliers generally pass along national price increases, cost increases, so everybody acts very normal. The good news here is we actually grew 9% gross profit on our tire category. We're staying very rational to our competitors. I like the position that the industry is in, and I like our position in the industry. Now on the parts side and the service side, the investment parts are a very small part of the repair order. It's most of it. is actually in our technician pay when you look at our costs and the gross profit associated with it. And the way we manage that with is local labor rates staying competitive in the marketplace. As the industry is investing in technicians, it generally invests in a higher labor rate and it's an offset. So two very different strategies inside of our buildings, but both of which it seems like right now we're able to pass along the cost to our customers.

speaker
Rick Nelson

Thanks for the color, Mike. Much appreciated. Good luck. Thank you.

speaker
Operator

Thank you. Our next question comes from the line of David Ballinger with Wolf Research. Please proceed with your question.

speaker
David Ballinger

Hey, thanks for taking the question. Just another one to further contextualize the January comp trends. Have you seen some type of stabilization in recent weeks? I know there are A number of companies out there are talking about a slower late December, early January with just the spread of the new variant. But have you seen anything change in recent weeks, or is this more of a continuation with lapping stimulus, the child tax credit disbursements running out? Just any comment you can make on what you're seeing in the later stages of January.

speaker
Felix

Yeah, I think that dynamic that you just laid out is fantastic. you know, kind of true for us as well. You know, we saw a top six weeks in general with the COVID related absences that, you know, being a service model, as Mike said in his prepared remarks, you know, our labor really is our product and to have that in store or to not have that in store because of COVID related absences, you know, really puts pressure on our top line. So we thought that, you know, the comp trends that we were able to deliver and the team was able to deliver despite that challenge and despite some of the stimulus that you mentioned, you know, really was a great outcome and great effort by the team. But as we move further from the December stimulus and we move to lower and lower cases related to Omicron each day, that obviously abates that disruption and allows those more supportive longer-term trends related to vehicle miles traveled and cars aging out to really come through. And the good news is we've got the labor in place to kind of pivot from holding down the fort during the challenging period and really going and playing offense and executing our in-store model as those challenges become more minimal.

speaker
David Ballinger

Thanks, Brian. That's very helpful. And then just my follow-up here on the sequential improvement in the overtime hours. So now as you step back, how much overtime is still in the system today? And what's the timeframe to reaching, call it, a more normalized level of OT and, you know, potentially better flow through to operating margins?

speaker
Monroe

Yeah, I'll take that, David. The opportunity that we have with overtime is really developing a service organization. I can't keep working people 60, 70 hours a week and think that they're going to stay with me. So the opportunity is, honestly, that we have more normal work weeks for our teammates. We're developing a service organization in every store. But it really gives us the opportunity to flex when the demand actually hits. And that's where I'm really looking forward to actually spending overtime, talking to you about the investments in overtime if it comes to life, because what we're doing is really investing in the growth. And we have an organization that's ready and prepared for it rather than being just a normal way of doing business. We have a long way to go still. I'm very happy with the 24% reduction. I'm very happy with the retention improvement and the turnover improvement that we're seeing in our organization. The last thing I want to do is train our technicians for our competitors. So I like the work that the team is doing. I do believe that it's setting us up for a strong Q4 and a great 2023 as things normalize. And that's what I'm hoping for for everyone. But that is just good retail just making sure that we are best-in-class service providers, making sure that we have a team ready to go, and they're willing to flex up, and they want to take that over time when there's a lot of demand.

speaker
David Ballinger

Thank you both. Appreciate it.

speaker
Monroe

Thank you. Thanks, David.

speaker
Operator

Thank you. Our next question comes from the line of Scott Stember with CL King & Associates. Please proceed with your question.

speaker
Scott Stember

Good morning, guys, and thanks for taking my questions. Good morning, Scott. Can you guys maybe let us know how much the tire segment underperformed due to weather? Just trying to get a sense of where tire sales could have been and the impact down to the bottom line.

speaker
Felix

Yes, Scott, I'll take this. This is Brian. Good morning. I'm not going to quantify it. I think that if you look at the industry trends, particularly in the Northeast, you can see the impact. year over year in units. So we were in line with the industry, which the industry being kind of pressured as it related to northeast water dynamics. So what we're happy about though is we continue to grow our average selling price and our average gross profit per tire as we really lean on and optimize our tire category management tool. That's been important for us to help manage that dynamic. But I don't think we're disappointed at all in our units relative to the industry.

speaker
Scott Stember

Okay, got it. And then my follow-up, we've a good year and a half to two years into the store reformations and a lot of these new programs going into place. With all this data and all this evidence, is there any way to talk about how those stores on balance over time have performed versus the stores that have not gone through some of these, you know, bigger changes?

speaker
Felix

Yeah, I mean, I think we've said historically that it's been 500 basis points of outperformance on the top line. I can say, you know, there's a lot of things pushing and pulling at these stores. They really are. Remember, they're individual stores affected by all the things we talked about today, staffing levels, weather dynamics, COVID waves. So, I mean, there's a lot of, I think, undercurrents that prevent maybe the overall trends from coming all the way through. But because of that, we've kind of not really talked about it anymore in our prepared remarks. But it's been 500 basis points through the last time that we disclosed that.

speaker
Jonathan Lammers

Got it. Thanks again. Thank you. Thank you.

speaker
Operator

Thank you. Our next question comes from the line of Stephanie Moore with Truist Securities. Please proceed with your question.

speaker
Stephanie Moore

Hi, good morning.

speaker
Jonathan Lammers

Good morning. Good morning, Stephanie.

speaker
Stephanie Moore

So I did want to follow up on a prior comment you made, Mike, and I think it's clear noting the strategy to expand further into service categories, but I think you did call out expanding, you know, further with even under the hood services. So maybe if you just want to follow up on that comment or expound on the area where you would consider to further expand just your offerings within service?

speaker
Monroe

No, that's a great question. So, yes, just so I can be clear, Monroe in the past has been very focused on, I mean, we started off with the exhaust, but now we've migrated to heavy tire. We've talked about the mix between tire and service, heavy tire, heavy brake, oil change, But when you look at a complete car care, check engine light is a big category that I would say has, we still have a significant opportunity to improve. And that is under hood, where you have the sensors, whether it's O2 and the whole engine management category that's so significant in our industry. One of the things that comes to life is the check engine light. And we are going to continue to build out our organization. And that's really important. You have to have the technicians to be able to properly diagnose. check engine light. And that's what we're focused on. It's not just tires and brakes. I mean, we're still going to do a great job doing that. But as our customers come in, there's going to be a check engine light. They're going to need to make sure that we don't let that car come off that lift without making sure that we resolve that check engine light at the same time. And I would say it's a big opportunity for our organization.

speaker
Jonathan Lammers

And I would say it's a category that we've significantly underperformed.

speaker
Stephanie Moore

Got it. No, that's helpful. And then my second question on M&A, can you maybe discuss your current pipeline, you know, any kind of dollar color you can give of what you have kind of lined up here, what competition you're seeing from an M&A standpoint, given the consolidation trends, any M&A color would be helpful. Thank you.

speaker
Felix

Yeah, I'll take that, Stephanie. So, obviously, we've talked about the 47 stores that we've completed already, 70 million in annualized sales. So, healthy rate of acquisition growth already this year through three quarters, and we continue to see a lot of opportunities for some very value-enhancing acquisitions. We have 10-plus NDAs signed, which is consistent with what we've had, and we feel like we're in a really good position to be able to execute on some of those in order to continue our acquisition growth strategy. We've got a strong balance sheet. We're generating a lot of cash, and we know that our acquisition growth is a great opportunity to really enhance shareholder value. So we remain focused on it. It's a key pillar of our growth strategy, and I'm sure we'll have more to talk about that on future quarters.

speaker
Stephanie

Great. Well, thank you so much.

speaker
Jonathan Lammers

Thank you.

speaker
Operator

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Broderick for final comments.

speaker
Monroe

Thank you for joining us today. This is an exciting time to be part of Monroe. We have a strong foundation to build upon to create long-term value for all our stakeholders. I look forward to keeping you updated on our progress. Have a great day.

speaker
Operator

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

Disclaimer

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