Monro, Inc.

Good morning, ladies and gentlemen, and welcome to Monroe Inc's earnings conference call for the first quarter of fiscal 2024. At this time, all participants are in 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 a call, please press star zero on your touchtone phone. And as a reminder, this conference call is being recorded and may not be reproduced in whole or in part without permission from the company. And I'd like to introduce Felix Pexler, Senior Director of Investor Relations at Monroe, Please go ahead.

Thank you. Hello, everyone, and thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we will be referencing a presentation that is available on the investor section of our website at corporate.monroe.com forward slash investors. 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 violence with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Additionally, on today's call, management 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.

Thank you, Felix, and good morning, everyone. I'd like to start off by acknowledging that our first quarter results fell short of the expectations that we set on our last earnings call in May. I'll spend the first part of our call this morning walking through the shortfall, which was primarily driven by lower than expected sales due to customer deferrals in our higher margin service categories in June. Broad-based inflationary pressures have persisted such that the consumer slowed their purchases of some of our higher ticket service categories. As a result of this, we took swift action to reduce non-productive labor costs, including overtime hours in our stores, which allowed us to preserve margins and profitability on lower than expected sales. I'll conclude with our plans to deliver improved earnings this fiscal year, despite some of the consumer-related headwinds that we and others in our industry are experiencing. Before I get started, I'd like to recognize and thank all of our teammates serving as trusted vehicle advisors in what continues to be a challenging macro environment for our customers. Now turning to our first quarter results and the actions that we took to reduce non-productive labor costs. Our first quarter comparable store sales growth of less than 1% fell short of our expectations. As I stated earlier, The shortfall was primarily driven by lower than expected sales due to customer deferrals in some of our key service categories in June. This also resulted in store comps for our 300 small underperforming stores that were consistent with our overall comps in the quarter. While our comps in the quarter fell short of expectations, customer traffic counts were in line with our expectations and remained consistent with improving traffic trends in the back half of fiscal 2023. And while our tire margins returned to solid footing, our overall gross margin in the quarter was impacted by a lower sales mix of higher margin service categories. This resulted in higher material costs and continued labor cost pressures as a percentage of sales relative to our expectations. We took swift actions to reduce non-productive labor costs, including overtime hours in our stores, which were down 23% year over year, and 13% sequentially. This allowed us to preserve margins and profitability on lower than expected sales. We will continue to closely manage our labor costs and expense to maximize store productivity. Now concluding with our plans to deliver improved earnings this fiscal year. While we will likely need to see an improvement in the overall health of the consumer before we can fully capitalize on longer-term industry tailwinds, We will remain relentlessly focused on achieving our mid single digit comp store sales expectations through accelerating growth in our 300 small or underperforming stores, maintaining a balanced approach between our tire and service categories with competitive pricing to drive store traffic and continuously improving our customer experience. Encouragingly, Our preliminary comp store sales growth for fiscal July are up approximately 1%, which is a positive rebound off the sales trends that we saw in fiscal June and a step in the right direction. We will also strive to expand our gross margins through appropriate staffing in our stores and properly training our teammates to maximize their productivity. However, given the current pressures on the consumer, we are also laser focused on maximizing profitability through prudent cost control which includes right-sizing our fixed costs and rationalizing unproductive labor. While we take these actions, we will not cut productive labor at the sacrifice of our standards and to the detriment of our long-term service model. In addition, we will continue to create cash by optimizing inventory and leveraging the strength of our vendor partners for better availability, quality, and cost of parts and tires in our stores. In closing, our business is well positioned, and we are confident that we remain on a path to restore our gross margins back to pre-COVID levels with double-digit operating margins over the longer term. With that, I'll now turn the call over to Brian, who will provide an overview of Monroe's first quarter performance, strong financial position, and additional color regarding fiscal 2024. Brian?

Thank you, Mike, and good morning, everyone. Turning to slide eight, sales decreased 6.5% year-over-year to $327 million in the first quarter, which was due to the divestiture of our wholesale tire and distribution assets in the first quarter of fiscal 2023. Sales for these divested assets were approximately $24 million in the prior year first quarter. Comparable store sales increased 0.5% and sales from new stores increased approximately $2 million. Gross margin was flat compared to the prior year. primarily resulting from 220 basis points of benefit from both the divestiture of our wholesale tire and distribution assets, as well as lower distribution and occupancy costs as a percentage of sales, which were offset by higher material costs and higher technician labor costs due to an incremental investment in technician headcount, as well as wage inflation. Total operating expenses were $97 million, or 29.7% of sales, as compared to $95.9 million or 27.4% of sales in the prior year period. The increase as a percentage of sales was principally due to the sales decline resulting from the divestiture of our wholesale tire and distribution assets, costs related to shareholder matters from our planned equity capital structure recapitalization, as well as transition costs related to our back office optimization in the current year, and a net gain on the sale of our wholesale tire and distribution assets in the prior year period. Operating income for the first quarter declined to $17.4 million, or 5.3% of sales. This is compared to $26.3 million, or 7.5% of sales in the prior year period. Net interest expense decreased to $5.2 million. It's compared to $5.7 million in the same period last year. This was principally due to a decrease in weighted average debt. Income tax expense was approximately $3.4 million, or an effective tax rate of 27.6%, which is compared to $8.1 million, or an effective tax rate of 39.6% in the prior year period. The higher effective tax rate in the prior year period was primarily due to discrete tax impacts related to the divestiture of our wholesale tire locations and tire distribution operations, as well as the revaluation of deferred tax balances due to changes in the mix of pre-tax income in various U.S. state jurisdictions because of the divestiture. Net income was approximately $8.8 million as compared to $12.5 million in the same period last year. Diluted earnings per share was 28 cents compared to 37 cents for the same period last year. Adjusted diluted earnings per share, a non-GAAP measure, was 31 cents. This is compared to adjusted diluted earnings per share of 42 cents in the first quarter of fiscal 2023. Please refer to our reconciliation of adjusted diluted EPS in this morning's earnings press release and on slide 8 in our earnings presentation for further details regarding excluded items in the first quarter of both fiscal years. As highlighted on slide 9, we continue to maintain a very solid financial position. We generated $72 million of cash from operations during the first quarter, including $52 million in working capital reductions. This has reduced our cash conversion cycle by approximately 71 days at the end of the first quarter compared to the prior year period. Our AP to inventory ratio at the end of the first quarter was 195% versus 178% at the end of fiscal 2023. We received $4 million in divestiture proceeds, We invested $8 million in capital expenditures, spent $10 million in principal payments for financing leases, and distributed $9 million in dividends. Lastly, given the higher interest rate environment, we opted to pay down some of our debt in the first quarter to reduce interest expense versus repurchasing shares under our program, which authorizes us to repurchase up to $150 million of the company's common stock. We have used our significant cash flow to reduce invested capital by $53 million during the first quarter. At the end of the first quarter, we had bank debt of $65 million, cash and cash equivalents of $15 million, and a net bank debt to EBITDA ratio of 0.3 times. While we are not providing full-year guidance, we are providing color to assist in your modeling. We expect to drive higher year-over-year sales through low- to mid-single-digit comparable store sales growth and outsized performance in our 300 small or underperforming stores, which is inclusive of an extra week of sales in our fiscal fourth quarter. We expect to drive year-over-year improvements in our gross margin through pricing actions, lower fixed distribution and occupancy costs as a percentage of sales due to a higher sales base, and productivity improvements from our labor investments and reduction of non-productive payroll, which will be partially offset by continued wage inflation. Total operating expenses as a percentage of sales are expected to be higher year over year due to increases in direct and departmental costs to support our store base, as well as the impact of inflation. Our tax rate should be approximately 26% for fiscal 2024. Regarding our capital expenditures, we expect to spend approximately $35 million to $45 million in fiscal 2024. We also expect to continue improving our operating cash flow, driven by continued working capital reductions. Our balanced approach of returning capital to shareholders through dividends and share repurchases, as well as opportunistically completing value-enhancing acquisitions, is expected to meaningfully increase our return on invested capital. And with that, I'll now turn the call back to Mike for some closing remarks.

Thanks, Brian. We're optimistic about our outlook for fiscal 2024 beyond. Although we still have important work to do, we remain well positioned to execute our growth strategy and deliver long-term value creation for our shareholders. With that, I will now turn it over to the operator for questions.

Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. And today we ask you to limit yourself to one question and one or two follow-ups. First question today comes from Brian Nagel from Oppenheimer. Your line is open.

Hey, guys. Good morning. Good morning. Good morning, Brian. So the first question I have, I'm just looking, you know, we're just running through the numbers here and, you know, looking at the monthly comps. And as you discuss in your script, I mean, June did slow down, but I mean, not just on a one-year basis, but really over, you know, even a multi-year stack. As you look at what caused that, I mean, I know you had mentioned, you know, the inflationary pressures, but, you know, it seemed like something, just given the trajectory in the business, something even more specific to June may have occurred.

Yeah, Brian, this is Mike. I'll take that. What we saw was across the board industry-wide. significant slowdown in tire-tire units, just the overall compression on tires. And I look at tires as a high-ticket item, and then I moved right into some of my service categories and the high-ticket service categories. What we did see was actually a decent balance of our customer transactions, so our invoice count was okay. It was just low-ticket invoices, all driven by the lack of, I would say, a healthy tire unit. And what we see, Brian, it was pretty much in our footprint. It was pretty much across the board on the tire category, in the tire category.

Got it. And I guess, you know, and I know we talk about this a lot, Mike, is the ongoing kind of repositioning that you've spurred here at Monroe. But as you look at the business now, in the release day, you reiterate the kind of longer-term guidance in that longer-term objective to get to consistent mid-single-digit comps. What levers are you pulling? I mean, clearly there's an unfavorable backdrop. We've discussed that. But what specific levers or are there incremental levers you can pull here to really get the business up to where you want it to be?

Yeah, that's a good question. You know, everything we've been doing is preparing ourselves to create a Monroe that's very nimble for the marketplace and the customer environment that we're dealing with. We divested and we're now out of that divestiture. We're a full year past, so we don't have to talk about that anymore. But all the work that the teams are doing are creating a better assortment for our teams to be able to sell, managing payroll to a point where we can manage payroll no matter what the circumstances are. As sales improve, we can really lever up. As sales decline, we can actually take payroll out. I give you an example of the team and the work that they've done on overtime. And that, I would say, has been pretty significant over the tenure that I've been here, is really getting an emphasis on controlling payroll. As we invest in our people agenda, it's going to be really important, and especially in the wage inflation that we're dealing with, is managing every hour for every store so that we can maximize productivity with our technicians. I would say the biggest lever that we have to pull right now is really fixing our small stores. Although those stores were never supposed to be linear, it took years for these stores to be underperforming. My expectation is that we deliver double digit comps in these stores. But when I look at these stores, most of them are low volume stores. So when they have missed one or two transactions a week, and these were maybe tire transactions, which is a good ticket, it really has an adverse impact on the comp. And, Brian, I have to tell you, when I look at the low-volume stores, it took several years to get there. It's going to take me some time in order for us to have consistent results. I think, secondly, a lot of the work that the team is doing is really creating a different culture, a sales culture, making sure that we just have a better environment for our customers that are coming in. And with a little bit of help in the backdrop, I think that we're well-positioned to go after that mid-single-digit number.

I appreciate the color. I'll pass it on to the next question. Thanks.

Thank you, Brian.

Our next question comes from Daniel Embro from Stevens. Your line is open.

Hey, good morning, everybody. Thanks for taking the question.

Thank you, Dan. Good morning.

I want to follow up on Brian's second question there on the underperforming stores. I think the outlook that Brian gave kind of implied low to mid-single digit comps, but it was driven by a better improvement this year in those 300 stores. I'm just trying to marry that with the comment in the release about, you know, you need the consumer to turn before things really get better. So I guess how much of that improved underperforming stores are in your control? And then maybe more specifically, like, what are the things you're changing right now to drive that improvement over the next six-ish months?

Yeah, so I would say in these stores, a lot of it is the people, focus on the people. So the people agenda that I started with from the very beginning coming on with the organization, I would say is the foundation for improving these underperforming stores. We've got to get the right team to create the right experience for our customers. Now, what are we doing holistically to support that initiative? Obviously, we're creating training. I've walked everybody through in the past creating a better environment. We're attracting better technicians so that we are able to do better work and we have better customer retention. Now, overall, when I look at the category on the tire assortment, now that we're a full year outside of the divestiture of our wholesale business, we have a better tire assortment. We are able to manage our margins. In the past, I've talked about the fact that we sold a lot of OPP tires. I'm actually very happy with our tire performance, looking at the market share data and how we're holding our own, looking at the margin we're producing, and looking at the mix of tires that we're selling. It's a very healthy mix of tires, and I feel like we're meeting our customers with the right assortment. I've talked about breaks in the past. There's a lot of work being done on our service categories. I still think we have a lot of work in front of us that we're executing in 24 to be able to help us drive sales and margin. These are all things to help these stores, the underperforming stores, as well as the rest of the chain. These underperforming stores, it just takes one or two transactions and their trajectory changes significantly in a week's period of time. And we're really managing that type of conversation every week when I'm focusing on these focus stores.

That's helpful. And then for my follow-ups, I wanted to maybe dig into gross margin a little bit here. You've cut sequential overtime I think you said 13% that seems like really nice growth there I guess what percent of labor hours remaining would still fall into the quote like non-productive classification or how much left is there to remove in terms of these non-productive hours until comps accelerate as you guys think about managing the cost base yeah we're this this is Brian Daniel we're not going to go specifically into how much productivity or unproductive time is still there

What we do know is it is a huge focus of the organization to drive out any unproductive labor. We believe that we're doing that through the actions that we've taken this past quarter, and we continue to do that. As Mike said in his prepared remarks, we are avoiding touching anything that we feel is truly supporting our top line growth. So that's why we feel like we can still go after mid-single digit comp store sales while carefully managing out unproductive labor. And those two things are competing with each other. At the same time, we're obviously managing all other fixed costs as well outside of store direct labor, including back office, to really make sure that we're being prudent about our cost structure against the top line backdrop.

And then I guess within the outlook, you kind of provided the framework, I think you said, of gross margins would be up year over year, is that driven more by the sales improvement, which is part of that, or more by further cost actions? Which of those levers is the bigger driver?

I think it's a mix of both. I think, first of all, we've got some easier gross margin comps coming up ahead of us. So that's the first thing. And then I think the second thing is that we expect to be able to drive that low to mid single-digit comp As we do that, we'll get leverage against our fixed costs. But at the same time, we're rationalizing and looking, like we said, for pricing actions, anything we can do to improve variable flow through. So I think it's a mix of both top line and other actions.

Got it. A follow-up with more up on. Appreciate it. Thanks. Thank you. Thank you.

As a reminder, if you'd like to ask any further questions, please press star 1 on your telephone keypad now. We now turn to Brett Jordan with Jefferies. Your line is open.

Hey, good morning, guys.

Good morning.

Could you talk about car counts in the quarter? I mean, to give us some sort of feeling for what a same skew price contributed year over year versus traffic.

I brought up the fact that our traffic was low single digits. a decline, low single digits. So when I look at our comp, it was driven by very low improvement in ARO. And I actually feel like that's, maybe I can even give more color into that. That is part of what we've been focusing here on Monroe, is making sure that we have a healthy customer traffic trend. Even though we had a significant backdrop, even though when I look at the industry data and I look at our units and tires, to actually have a very low single-digit unit decline, invoice decline, I feel like we're really waiting or we're managing the business in an appropriate way. We just didn't have the tire business that came in, Brett. We just didn't have it.

Yeah, okay. And then you called out in the sort of non-recurring expenses the cost of the recap. Was there anything that was in the quarter that was sort of a pre-spend on the ultimate recap, or was that – could you – carve out what was that number?

Yeah, no, I mean, those are just fees and normal expenses associated with the recapitalization.

Okay. And then could you give us the monthly comps?

Sure. We were up 2.4% in April, 0.7% in May, and down 1.6% in June.

Okay, great. And then any regional dispersion, West Coast versus Northeast versus Southeast?

Yeah, the Midwest and the West comped slightly above our consolidated comps, and the Northeast, obviously, where we have a lot of stores, was below. The South was a little bit below as well.

Okay. Great. Thank you. Appreciate it. Thanks, Brett.

This concludes our Q&A. I'm going to hand back to Mike Broderick, President and CEO, for closing remarks.

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 our stakeholders. I look forward to keeping you updated on our progress. Have a great day.

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.