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spk00: Good morning, ladies and gentlemen, and welcome to Monroy Inc's earnings conference call for the fourth quarter and full year 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 assistance during the call, please press star followed by the number zero on your touchtone phone. And as a reminder, this conference call is being recorded and may not be reproduced in whole or in parts without permission from the company. I would now like to introduce Felix Wexler, Senior Director of Investor Relations at Monroe. Please go ahead.
spk02: Thank you. Hello, everyone, and thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we will be referencing a presentation that is available on the Investors section of our website at corporate.monroe.com. 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 in an earnings release and include the significant uncertainty related 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 GAAP measures. Reconciliations of such supplemental information to the comparable GAAP measures will be included as part of today's presentation and in our earnings release. With that, I'd like to turn the call over to Monroe's President and Chief Executive Officer, Michael Broderick.
spk01: Thank you, Felix, and good morning, everyone. I'd like to start off this morning by thanking all of our teammates and customers for their contributions to the growth and prosperity of our company, and our shareholders for their continued support. We had a tough fourth quarter, principally January, but we have begun to see the initiatives we put in place take hold and produce results. This morning, I'd like to cover four areas. Our fourth quarter results and how it played out, current trends, the impact of our initiatives and a look at our expectations for the next few months, the divestiture of our wholesale and tire distribution assets that was announced today, the rationale and how it fits into our overall strategy, and our capital allocation plans. Before we get into the details, a few words about our strategy, which many of you heard before but which bear repeating. We operate in a business with growing demand for our products and services. We are a leading player in this industry. We have developed a strategy to improve our underperforming stores, which represent about a quarter of our overall store base. The majority of our stores are growing sales and producing solid margins. We have evidence that our strategy is working. After 20% comparable store sales growth in the first nine months, The fourth quarter was severely impacted by COVID-19 surge. This impact was felt across our industry. The sales shortfall amounts to approximately $15 million versus our internal plan, or 15 to 20 cents of earnings per share. Nonetheless, our staffing strategy is working. In the fourth quarter, we added 200 technicians, which are in addition to the 450 technicians added since the first quarter of fiscal 22. This has resulted in us now having 650 more technicians than at the start of this initiative, a 15% increase. Of course, this carried a cost. Our technician labor costs increased 250 basis points, but also resulted in a substantial improvement in sales. In fiscal 2022, comparable store sales in our medium and larger stores increased about 5% compared to fiscal 2020. During the same time period, Comparable store sales in our 300 or so small and underperforming stores declined by about 8%. Understaffing was the principal reason. Let me make this point very clear. These stores received a healthy number of inquiries. Had they been able to convert these inquiries at the company average, their sales would have been quite different. They just did not have the necessary staff to provide the prompt level of service that customers require. We started implementing our new staffing initiatives in over 150 of the smaller stores. In the three fiscal months ended April 2022, their comp sales increased 8%, a 16 percentage point swing in their performance. Our staffing strategy to meet latent demand is working. We hope to have all 300 underperforming stores properly staffed by the end of calendar year 2022, subject to the tight labor market. We expect even better results as the year progresses. And all of this has been done while maintaining our material margins. As we move forward in fiscal 2023, sale trends are encouraging. While April's comparable store sales were 3% lower than our record April last year, May is trending 3% higher on a larger sales base. To summarize, in fiscal 2022, we made large investments in recruiting, training, and deploying new technicians. particularly to our medium and larger stores. These technicians are now starting to produce results as measured by higher service and tire sales and higher material margins. We are now working to improve the sales and productivity of our 300 small and underperforming stores. The demand is there and we believe we are now meeting it as the early numbers show. Now turning to the divestiture we announced today. This morning we announced an agreement to divest our wholesale and tire distribution assets to American Tire Distributors, a major player in that business. It had become very clear after an exhaustive review of our wholesale locations that we were too small to be an effective competitor. In addition, we found that we could get much better service from a large national distributor than we could provide by doing it ourselves. Our core strength as a business is to provide retail customers with superior automotive products and services. We will focus all our energies and resources on our retail operations. Our relationship with American Tire Distributors will give us a much better availability of tires, much quicker delivery, and better pricing. The transaction valued at about $105 million is expected to close in June. The proceeds from this transaction, along with the excess cash that our retail operations are expected to generate, will allow us to continue expanding our longstanding policy of sharing our results with our shareholders. The Board of Directors has approved a two cent per share increase in the cash dividend for the first quarter of fiscal 2023 to 28 cents per share. We have increased our cash dividend 17 times during the 17 years since the cash dividend was first issued. In the past five years, we have increased our quarterly cash dividend from $0.18 per share to $0.28 per share. In addition, the board has authorized the share repurchase program for the repurchase of up to $150 million of the company's common stock. Acquisitions are a major part of our strategy. We believe we have ample capacity for large, medium, or small-sized businesses which fit into our overall strategic plan. We investigate thoroughly, decide on how to integrate the new company into our team, and concurrently learn as much as possible about our new teammates. This careful approach results in a successful transaction, as shown by our recent California acquisitions, which are producing results ahead of our expectations. Above all, we strive to maintain price discipline, particularly in this era of high multiples. This pays off. In summary, there is robust demand for our products and services. In fiscal 22, we made significant investments in technician headcount productivity to expand sales and earnings. While this put pressure on our gross margin, it has positioned us to drive sustainable, comparable store sales growth in fiscal 2023. We believe we are well on our way to resolving the understaffing that has impacted our smaller stores. Along with continued contribution from our medium and larger stores, we expect to deliver comparable store sales and earnings per share growth, as well as significant cash flow generation. The divestiture of our non-core wholesale and tire distribution assets will allow for a sharper focus on our retail operations. This will allow us to return capital to our shareholders through healthy dividend and share repurchase programs, as well as capitalize on acquisitions. With that, I'll now turn the call over to Brian, who will provide an overview of Monroe's fourth quarter performance, strong financial position, and additional color regarding fiscal 2023. Brian?
spk03: Thank you, Mike, and good morning, everyone. Turning to slide nine, sales increased 7.4% year over year to $328 million in the fourth quarter. Same-store sales increased 1.4%, while sales from new stores increased $19 million. Gross margin decreased 320 basis points from the prior year to 31.9%. The year-over-year decrease was primarily due to an incremental investment in technician headcount and wages to support current and future top line growth. We estimate that this incremental investment impacted gross margin by 250 basis points in the quarter. Lower than expected comparable store sales growth also resulted and higher fixed distribution and occupancy costs as a percentage of sales. Material costs as a percentage of sales were flat, as the inflationary impact of higher material costs were offset by higher selling prices and a mixed check towards our higher margin service categories. Total operating expenses were $93.2 million, or 28.4% of sales, as compared to $86.4 million, or 28.3% of sales in the prior year period. The increase was principally due to having 41 new stores, as well as due diligence and integration costs related to acquisitions completed and evaluated in fiscal 2022. Operating income for the fourth quarter declined to $11.5 million, or 3.5% of sales, primarily driven by lower year-over-year gross margins. This is compared to $20.7 million, or 6.8% of sales in the prior year period. Net interest expense decreased to $5.7 million as compared to $6.7 million in the same period last year. This was principally due to a decrease in weighted average debt. Income tax benefit was a net benefit of $2.4 million, which included a $3.1 million tax benefit due to differences in statutory tax rates from lost years in which net operating losses have been carried back. This compares to $2.3 million of tax expense in the prior year period. Net income was $8.6 million as compared to $11.8 million in the same period last year. Diluted earnings per share was 25 cents compared to 35 cents for the same period last year. Adjusted diluted earnings per share, a non-GAAP measure, was 20 cents in the quarter and excluded approximately four cents per share of costs related to store impairment charges, and acquisition due diligence and integration costs, and $0.09 of income tax benefit related to net operating loss carryback. This compares to adjusted diluted earnings per share of $0.38 for the same period last year, which excluded $0.03 per share of costs related to our Monroe Forward initiatives, management transition costs, and a distribution center closure. As highlighted on slide 10, we continue to maintain a very solid financial position. We generated $174 million of cash from operations during fiscal 2022. We invested $28 million in capital expenditures, paid $83 million for acquisitions, and spent $39 million in principal payments for financing leases. Lastly, we distributed $35 million in dividends. At the end of the fourth quarter, we had bank debt of $176 million, cash and cash equivalents of $8 million, and a net bank debt to EBITDA ratio of 0.9 times. While we are not providing guidance for fiscal 2023, we are providing color to assist in your modeling. Note that our fiscal 2023 comments exclude the P&L impact from the divestiture of the wholesale and tire distribution assets. While we are still working to finalize the one-time gain or loss on the divestiture, we expect the ongoing impact to be accretive to overall gross and operating margins and neutral to earnings per share. As we make investments in store labor to drive higher year-over-year sales, this will continue to put pressure on our gross margins in fiscal 2023, which should be offset by a higher percentage of service sales, pricing actions, and lower distribution and occupancy costs as a percentage of sales as we leverage higher sales against largely fixed costs. Total operating expenses are expected to be slightly lower as a percentage of sales on a year-over-year basis. And regarding our capital expenditures, we expect to spend approximately $40 million to $50 million in fiscal 2023. And with that, I will now turn the call back over to Mike for some closing remarks.
spk01: Thanks, Brian. We're encouraged by the momentum in our business and optimistic about our outlook for fiscal 2023 and beyond. Overall, we believe 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'll now turn it over to the operator for questions.
spk00: Thank you. If you would like to ask a question, we invite you to press star followed by one on your telephone keypad. If you change your mind or no longer wish to ask your question, you can press star followed by two. And please ensure that you are unmuted locally when you go to ask your question. We'll pause briefly to allow for questions to be registered. Our first question today comes from Jonathan Lamers of BMO Capital Markets. Jonathan, over to you.
spk04: Good morning. Good morning. Yeah, I'm not sure how much color you want to give here, but for those 300 underperforming stores, could you tell us how far the gross margins are below average? Maybe how much the margins improved as the comp sales swung from negative 8% to positive 8%?
spk01: Jonathan, that is a big initiative on behalf of Monroe. I've talked about it in the past that every retailer has the bottom 300 stores. I would say most of my prepared remarks were centered around the fact that we really do have sales under control when we marry demand and supply. And the demand is our customers and supply is managing our teammates. I can tell you from a gross profit perspective, they're very similar to most of our stores. So it's really all about marrying capacity and productivity. And we just need to get the sales volume up to a level where they're able to drive to the bottom line. Those sales can fall to the bottom line.
spk04: Okay. And how much further does the technician head count need to increase by year end, fiscal 2022? And do you have any update on the progress into fiscal Q1?
spk01: So we continue to really optimize and really kind of work on re-assorting our labor across all our stores. And I think that's a big opportunity for us to continue going forward. But we're in the later innings of how many additional headcounts. I mean, we've made a significant investment in 22 to really put us in 23 in a situation where we can take care of the demand in the marketplace. But right now, it's really focused on those small stores. as well as opportunistically filling in in other stores where we have a significant amount of demand, just keeping up with the demand.
spk04: Okay, one detailed question before I turn it over. What were the trailing sales for the tire distribution assets that were sold? And Brian, did you say that the sale will be accretive to gross margin?
spk03: Yes, Jonathan. I'll take the second part first. They will be accretive to gross and operating margins and neutral on an earnings per share basis. And those assets generate about $115 million in sales for trailing 12.
spk04: Okay, thanks. I'll pass the line.
spk01: Thank you.
spk00: Thank you, Jonathan. Our next question today comes from Brett Jordan of Jefferies. Brett, over to you.
spk05: Hey, good morning, guys. On the divestiture of the distribution business, is there – I guess from the physical infrastructure standpoint, like the Monroe, Rochester, D.C. was sort of, I think, sort of almost attached to some of the corporate infrastructure. Do you have to do much physical carve out here, or do they sort of operate within your infrastructure? And I guess the second follow-up on that is that is all parts sourcing going to be external now since your ability to direct import parts and put them on the tire truck might be challenged?
spk01: Yeah, let me address it. So more details to come, exactly how the DCs are laying out. But where we're going as an organization very much is relying on our third-party partners. I've talked about in the past that I'm relying on my third-party partners on the parts and now on the tire side, ATD. to manage availability, quality, and price. When I look at this business I've been in for 30 years, Brett, it's all about relationships and it's all about using partners to make us a better organization. We're going to be focused on our retail customer, our commercial customer, and also focusing on our teammates. That's our focus. Now, specifically around parts, we're going to be extremely loyal to our parts providers. going forward. We're not going to just source the top 50 movers and expect our retail or our preferred partners to source the slow moving items for us. We're going to look across the board and we're going to rely on them to be able to provide us the products. I believe that's going to give us a better price in the marketplace. We're going to be more significant to our third party partners going forward. The same thing goes for tires. We're going to improve our service to our stores. We're going to get everyday service which we're not getting right now from our distribution centers. Remember, most of those warehouses were centered in North Carolina and Kentucky, so they didn't reach all of our stores. So now we're going to have everyday delivery from ATD, which is best in class, and I'm really looking forward to bringing new assortment to our stores so that we can be more relevant on both the tires and then continue to evolve our parts distribution using our third-party providers.
spk05: Okay, great. And then that question on the tire pricing model, I think you said tires were down one on the comp. Could you talk about what was units versus price in the Q4 comp on tires? And maybe, I guess, if you have it, the units as a comparable to pre-COVID, like Q4 of, I guess, fiscal 19 or just sort of feel where we are in volumes versus a pre-pandemic environment.
spk03: Yeah, Brett, I'll take that. I would say that like all kind of parts of our business in the quarter, ticket was the leading factor in the comp performance. And I would say relative to the unit performance that what we saw was that we were in line with industry trends for our retail business throughout the quarter. So our ability to continue to hold units while driving ticket and certainly continuing to see variable gross profit per tire increase as well in the quarter. We think that the tire category has been really strong for us and it happened again in Q4.
spk05: Okay, great. And with my last housekeeping, the monthly comps, I think you've given us January and April or January. even as one or two of the months. Could you give us the monthly for the quarter?
spk03: Yeah, it was up about one in January, up five in February, and down about two in March. Okay, great. Thank you.
spk00: Thank you, Brett. Our next question comes from Brian Nagel of Oppenheimer & Co. Brian, please go ahead.
spk06: This is William Dawson on for Brian Nagel. Thanks for taking our question. So, our first question was with regard to gross margin. There was some expectation for more improvement as the sales mix of services recovered. Can you say at what point in the quarter the decision was made to lean into the incremental investments in technicians and how we should think about the magnitude of the impact to gross margins in Q4? for the quarters of fiscal 2023 and in March.
spk01: All right, William. This is Mike. Good morning. Just to be clear on gross profit, there's three components of gross profit for us. Material margin, D&O, distribution and occupancy, and then last but not least is technician payroll. When you look at material margin, we were flat until last year, and we have that under control. We manage that through price and mix. So when we talked about moving to service categories, that was a big deliverable for our organization, even in the fourth quarter. I'll give you a great example. We actually lowered our break pricing and drove more units, and that actually helped us deliver a better mix in the business. Number two, when I look at D&O, we had pressures in our distribution costs in the fourth quarter, without a doubt. Looking forward, though, that's gonna become much less of an issue as we rely on ATD for our tires and we rely on our preferred suppliers on the parts side. And then number three, technician payroll. We started this in 22. We clearly recognized there was demand for our services in almost every one of our stores. Our best stores are performing extremely well. It's our bottom 300 stores that traditionally have been understaffed that have not been able to meet demand. So what we've done through 22 in a very deliberate way is literally continuing to invest in our technician payroll. Now, just to be clear, the investment in technician payroll, there's two different components of investment. There's one is the wage inflation, and number two is the actual headcount. I'll break out that 250 basis points to be more clear. We invested 150 basis points in the fourth quarter on incremental technicians, 100 basis points in wage inflation. Just to be clear, I do believe that we're going to continue to leverage as we go into more productive seasons in the first and second quarter. We have not talked about exactly how it breaks out, and there's going to be a lot of moving pieces, and we look forward to giving you more clarity after the first quarter and separating out the wholesale business.
spk06: Thank you. That's very helpful. And our next question with regard to top line. In fiscal April, comps were down 3% year-over-year versus the record last year. And here in May, quarter-date, it's turning up 3%. So is this weather-related, or is there other factors in the plan with your consumer that's responsible for the recent improvement? And also recognizing that you're not giving guidance to the balance of fiscal 23, but how should we think about the puts and takes with regards to sales over the next couple of weeks or months?
spk01: Can I just go back to January just to be very clear? January, although we were positive, it was significantly below our internal expectations. And we were pretty consistent across at least the prior two quarters of having mid-team type of growth that we were getting used to. So things really changed. Coming out of January, even the first couple of weeks in February, remember a week or two in February, we had soft sales. Then it immediately changed as our customers and our teammates got healthier. So we really saw a lot of improvement coming out of COVID. Then when you look at the March performance, it's all productivity. So when we were adding capacity and managing capacity, now the next step is how do we drive productivity with the new teammates that we have so that we really can get outsized performance? And that's what we saw even in April. And we're carrying that forward into May That is the equation going forward is we have increased capacity with more technicians, and now how do we get their productivity up? And that's how this really becomes a healthy business very quickly.
spk06: Thank you.
spk00: Thank you, Brian. Our next question is a follow-up question from Jonathan Lamers of BMO Capital Markets. Jonathan, back to you.
spk04: Thanks. When I look at the stack versus calendar 2019 levels, we're not really seeing improvement in the April and May. It's sort of 0% versus 0% in fiscal Q4. So I guess my question is, how much do you need to see the comp improve to start returning the gross margin percentage toward historical levels, given where staffing levels are now?
spk01: We generally are looking at mid-single digits, Jonathan, if that helps with identifying where the opportunity and where we're focused.
spk04: Yeah, that does help. I mean, the tire manufacturers have announced some pretty significant price increases recently. Do you have any comments on your pass-through of that in recent weeks and months and whether you expect to maintain your variable gross margin per tire?
spk01: That is a big focus. We definitely understand there's a lot of cost increases coming into the marketplace. I'm recognizing the team. They've done a great job managing costs and passing it along I've said in the past, and I continue saying we're a rational competitor, where we can pass along costs, we are definitely doing that. We're managing our markdowns. We're managing really our promotional activity to be able to keep in line with margins. And it seems like we're holding, at least we're staying very consistent with industry trends. And that's more of what we're going to be doing going forward. And last but not least is we're going to continue to give our customers choice. Maybe they trade down into a lower cost tire based on their economic well-being at that point in time. But we're still going to make good margins on those tires. It's about getting those customers into our door. We are looking for a balanced approach to the business. Both Ticket, which we've demonstrated that we can drive Ticket like most retailers right now, and now our focus is driving additional repair orders, additional customers into our stores.
spk04: So just the last question, just on that outlook for getting to mid-single-digit comps, is the business almost there given the turnaround in the underperforming stores? I mean, how long should we think about things playing out before you get to that level?
spk03: Yeah, I think we are seeing the business on a consolidated basis build to that level, and I can say also that you know, that comp that we're saying in May of plus three is being led by our retail location. So we are definitely encouraged by the momentum that we are seeing. And we talked about it in the prepared remarks that we expect continued improvement as the year progresses.
spk04: Okay, thanks for your comments. Thank you.
spk00: Thank you, Jonathan. Our next question comes from Daniel Imbrow of Stevens Inc. Daniel, over to you.
spk07: Thanks for taking my questions, guys, and good morning. Brian, I guess not to belabor the point, but I wanted to follow up on Will's question on the gross margin. A few months ago in late January, I think you noted you expected gross margin leverage. Obviously, we came in a few hundred basis points below that, and if I think about it, you knew about the headcount investment Mike just mentioned that we knew January comps were weak. So I asked another way, I guess, what was the biggest surprise in the quarter versus your expectation in late January? And then given how fast that changed, how do you feel about your visibility into full year gross margin and kind of the outlook you provided just given the volatility we just saw in the last couple of months?
spk03: Yeah, that's a great question. I appreciate it. I think that as you look at where we were at the end of January, we did have some expectations of recovering some of the sales loss that we saw coming through January. So not having captured that as we moved through the quarter, we did see strengthening in February. But as Mike said, it did a few weeks into February until we saw that rebound in our business. That continued to put a little bit of pressure on the top line, which, as you know, puts pressure on our distribution and occupancy costs as a percentage of sales. So we lost more leverage there than maybe the comments at the third call, third quarter call reflected. In addition, you know, I think that we continue to make great progress in our labor investment. And I would say that, you know, we are well positioned and probably maybe a little bit ahead of schedule in terms of those hires, the incremental 200 we were able to make in Q4, even in this, you know, kind of challenging labor environment and certainly challenging COVID environment. in Q4. And then also I would just highlight that Mike said the team has done a great job of offsetting material cost increases with our sales next shift to service, but also passing through price. And I think that maybe we had a little bit of leverage in material costs factored into that outlook at the end of the quarter, last quarter, where we came in more and more flattish as inflation built in during Q4.
spk07: Got it. And so I guess the second part of that question, when you look at the full year outlook you provided or the commentary around gross margin, you feel comfortable that, you know, given all the potential volatility in sales, we can still achieve, achieve the kind of outlook you discussed earlier, Brian, um, you know, I'm just trying to handicap maybe how volatile the model could be as we move through the year.
spk03: Yeah. I mean, I think Mike really highlighted the key to, uh, to our ability to do that and what we're seeing, uh, with the labor investments we have made, which is continue to increase productivity in our labor. As we continue to drive productivity for the technicians we've added and continue to meet the demand that's in the marketplace with more higher productive technicians, that will ultimately benefit our gross margins and our ability to take what was a headwind in labor in Q4 for margins And as we progress through the year, turn that into more neutral, even a tailwind as we move into the later parts of this year. But just like sales, that will improve as the year progresses. There will be more pressure earlier in the year, and it will improve as our productivity and sales continue to climb as the year progresses. Those are our expectations.
spk07: Got it. And the last one for me, and maybe just a clarifying point, Mike, I mean, You mentioned, obviously, labor is a point of deleverage, but I think, Brian, you just mentioned you hired a ton of people. I'm trying to square away those two comments where we left sales on the table because we didn't have enough technicians, so that was a headwind to comps, but then we overhired relative to expected demand, and that was a headwind to gross margin. Can you square away those two statements? They seem to be contradictory. One says we have too much labor for demand. One says we don't have enough labor. Just trying to clear of any confusion there on those two comments.
spk01: Well, let me be crystal clear about then January. That was a very difficult month for our service organization, just like all retailers. But I had one third of my stores that were affected by COVID. We hadn't seen that type of in two years. So when I look at our investment in labor, we needed everybody. We really did. We were moving people around our stores. We were paying overtime. There was a lot of moving pieces. And I keep going back to recognizing the team. I did that in the third quarter. I'm going to continue doing that today. Recognize the team for how well they managed that. Now, when you look at the financials, it definitely does put pressure on the P&L. But we actually invested through the fourth quarter so that we can have really a jumping point off for the first quarter of 23. And as Brian has stated and I've stated, we're seeing it. Led by retail. So I hope I'm clearing that up without pressure in the fourth quarter, but that leverage is coming through in the first quarter of 23. Got it.
spk07: Appreciate the cover, guys.
spk03: Best of luck.
spk01: Thank you.
spk00: Thank you, Daniel. If that was our final question, I would like to hand back to Michael Broderick for any closing remarks.
spk01: Well, thank you for joining us today. This continues to be an exciting time to be part of Monroe. We have a strong foundation to build upon to create long-term value for all of our stakeholders. I look forward to keeping you updated on our progress. Have a great day.
spk00: Thank you. This concludes the call today. We thank you all for joining and wish you a great rest of your day. Thank you.
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