Monro, Inc.

Good morning, ladies and gentlemen, and welcome to Monroe Inc's earnings conference call for the third quarter of fiscal 2025. 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 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. I would now like to introduce Felix Wechsler, 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 filings 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. Lastly, unless otherwise noted, all references to comparable store sales, category sales, and units on today's call will be made on an adjusted for days basis, which adjusts for one fewer selling day in the current year quarter due to a shift in the timing of the Christmas holiday from the fourth quarter in fiscal 2024 to the third quarter in fiscal 2025. 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. This morning, I'd like to share an update with you on our third quarter accomplishments. After that, I'll outline several objectives that we plan to achieve in the fourth quarter. Before I begin, I'd like to recognize and thank all of our teammates for their dedication to Monroe and our customers. Turning to slide three, starting with our accomplishments in the third quarter. We drove a sequential improvement in our year-over-year comp store sales percentage change from the second quarter and returned our business to year-over-year comp store sales growth in the month of December. We believe that our initiatives provide the foundation for continued momentum in our top line performance. Importantly, The year-over-year comp store sales percentage change in both our tire dollar and unit sales improved sequentially from the second quarter, and our tire category sales comp positive in the month of December, with year-over-year growth in units in the quarter. We continue to leverage the strength of our manufacturer-funded promotions, which allowed us to meet the needs of a value-oriented consumer. Now that we've completed the rollout of our Comfort Drive digital courtesy inspection process, we've continued to improve communications and educational selling that has built trust and further solidified relationships with our customers. Comfidrive and our oil change offer, as shown on slide four, allowed us to drive sequential improvement in our year-over-year service category comp store sales percentage change from the second quarter. We drove year-over-year growth in both unit and sales dollars for batteries, alignment, and front-end shocks. And while we drove sequential improvement from the second quarter in our break category, we continue to focus on returning this high margin category to unit and sales growth. Consistent with general industry trade down dynamics, our gross margin in the third quarter continued to be impacted by a value oriented consumer that traded down more of their tire purchases to our tier three offerings. We also increased our level of self-funded promotions to attract value oriented consumers into our stores. And while this pressured material margins in the quarter, we continue to drive labor optimization and efficiencies through productivity improvements, including scheduling training and our attachment selling initiatives. We remain committed to sales and unit growth and improving customer accounts. And we are willing to make the necessary price and promotional investments, even if it puts pressure on our profitability in the near term. Now, onto our objectives for the fourth quarter. Our preliminary fiscal January comp store sales are down 1%, adjusted for one additional selling day in the month. This is driven by weakness in entire category sales that were impacted by extreme weather, which resulted in temporary store closures and lower store traffic, partially offset by strength in our service categories, including breaks. We believe the extreme weather in January will benefit us in the coming months. We expect to leverage our initiatives to achieve our fourth quarter objectives, which include improving store traffic trends driven by our value-oriented oil change offerings, as well as continued growth in tire units, accelerating the performance of our key service categories, utilizing the benefits from Confidrive, and optimizing labor and efficiencies through continued improvements in productivity and maintaining prudent cost control. In summary, our initiatives are driving an improvement in our top-line results. Our comp store sales trends improved sequentially from the second quarter, and we exited the quarter with year-over-year comp store sales growth in the month of December. This was led by our tire category sales, which comp positive in December with year-over-year unit growth in the quarter. While we have more work to do to improve the performance of our high margin break category, we drove a sequential improvement in our year-over-year service category comp store sales percentage change from the second quarter and year-over-year growth in batteries alignment and front-end shocks in the quarter. And although our gross margin took a step back in the quarter, we continue to be focused on sales and unit growth and improving customer counts and are willing to make necessary investments, even if it puts pressure on our profitability in the near term. We are confident we remain on a path to restore our gross margins back to pre-COVID levels with double-digit operating margins over the long return as we return to top-line growth. The traction from our initiatives will enable us to achieve our fourth quarter objectives. And with that, I'll now turn it over to Brian, who will provide an overview of Monroe's third quarter performance, strong financial position, and additional color regarding the remainder of fiscal 2025. Brian? Thank you, Mike, and good morning, everyone.

Turning to slide five, our year-over-year comparable store sales percentage change. improved 500 basis points sequentially from the second quarter of fiscal 2025. Sales of $305.8 million decreased 3.7% year over year, which was primarily driven by a 1.9% decline in comparable store sales unadjusted for days. ComStore sales decreased 0.8% when adjusted for days. As Mike just walked through, We returned our business to year over year comp store sales growth in the month of December. For reference, comps were down 1% in October and down 2% in November. We exited the quarter up 1% in December. Tire units were up low single digits in the third quarter, driven by mid single digit growth in units during the month of December. We also gained tire market share in our higher margin tiers in the quarter. Comp store sales in approximately 300 of our small or underperforming stores were about 250 basis points higher than our overall comp in the quarter. Turning to slide six, gross margin decreased 120 basis points compared to the prior year, primarily resulting from higher material costs due to mix with intires and an increased level of self-funded promotions to attract value-oriented consumers into our stores. which was partially offset by lower technician labor costs as a percentage of sales. Total operating expenses were $94.8 million or 31% of sales as compared to $91.3 million or 28.7% of sales in the prior year period. The increase on a dollar basis was principally due to higher store direct and departmental costs to support our stores. Operating income for the third quarter declined to $10 million or 3.3% of sales. This is compared to $21.4 million or 6.7% of sales in the prior year period. Net interest expense decreased to $4.2 million as compared to $5 million in the same period last year. This was principally due to a decrease in weighted average debt. Income tax expense was $1.2 million or an effective tax rate of 21.2%, which is compared to $4.2 million, or an effective tax rate of 25.8% in the prior year period. The year-over-year difference in effective tax rate is primarily due to state taxes, discrete tax impacts related to share-based awards, and an audit settlement of certain prior year state income tax returns. Net income was $4.6 million, as compared to $12.2 million in the same period last year. Diluted earnings per share was $0.15. This is compared to $0.38 for the same period last year. Adjusted diluted earnings per share, a non-GAAP measure, was $0.19. And this is compared to adjusted diluted earnings per share of $0.39 in the third quarter of fiscal 2024. Please note that the Christmas holiday shift negatively impacted both diluted EPS and adjusted diluted EPS by approximately 5 cents in the third quarter of fiscal 2025. Please refer to our reconciliation of adjusted diluted EPS in this morning's earnings press release and on slide 10 in the appendix to our earnings presentation for further details regarding excluded items in the third quarter of both fiscal years. As highlighted on slide 7, we continue to maintain a strong financial position. We generated $103 million of cash from operations, including $27 million of working capital reductions during the first nine months of fiscal 2025. Our AP to inventory ratio improved to 179% at the end of the third quarter versus 164% at the end of fiscal 2024. We received $9 million in divestiture proceeds, as well as $9 million from the sale of our corporate headquarters. We invested $21 million in capital expenditures, spent $30 million in principal payments for financing leases, and distributed $26 million in dividends. At the end of the third quarter, we had net bank debt of $49 million, a net bank debt to EBITDA ratio of 0.4 times, and total liquidity of $521 million. As we have commented earlier and on recent earnings calls, we have made significant progress in several foundational areas, including gross margin expansion in the first nine months of fiscal 2025, inventory optimization by leveraging strong vendor partnerships, and our solid financial position. These foundational improvements, coupled with our market-facing initiatives, including our Comfort Drive digital courtesy inspection process, our oil change offer, and focus on approximately 300 of our small or underperforming stores, as well as our relentless focus on improving the guest experience, are setting us up for improved financial performance. Now, turning to our expectations for the remainder of full year fiscal 2025 on slide eight. Please note that fiscal 2025 is a 52-week year, while fiscal 2024 was a 53-week year that benefited from an extra week of sales in the fourth quarter. We remain focused on sales and unit growth and improving our customer counts while making the necessary price and promotional investments to do so. We expect to generate at least $120 million of operating cash flow inclusive of continued working capital reductions in fiscal 2025. The strength of our financial position, including our cash flow, positions us to fund all of our capital allocation priorities, including our dividend, during the remainder of fiscal 2025. Regarding our capital expenditures, We expect to spend $25 million to $30 million in fiscal 2025. And with that, I will now turn the call back over to Mike for some closing remarks.

Thanks, Brian. Our business has long-term durability in an industry that remains fundamentally strong. Our initiatives are driving an improvement in our top-line results. This, along with our cash flow generation, will enable Monroe to reap benefits as tire volumes continue to recover. We are poised to win with our scale, strategic relationships and our experience management team. With that, I'll now turn it over to the operator for questions.

Thank you. We will now begin the Q&A session. If you would like to ask a question, then please press star followed by one on your telephone keypad. To withdraw your question, please press star followed by two. Please also ensure that your phone is unmuted locally. We kindly ask that you limit yourself to one question and one or two follow-up questions. Our first question comes from Seth Basham from Wedbush Securities. Seth, please go ahead.

Thanks a lot and good morning. Nice to see the progress on comps and gross profit comps. And we're wondering whether or not we'll continue to see improvement in gross profit comps TAB, Mark McIntyre, Going forward, or you plan on accelerating investments in price and promotion and seeing mixed deterioration such that will not be the case what's the framework to work through.

TAB, Mark McIntyre, yeah related to to gross margin in the quarter our gross margin declined 120 basis points, I was driven by material costs of 150 basis points. partially offset by a decrease in technician pay of 30 basis points. So the increase in the material costs, as you mentioned, was related to the continued trade-down of consumers to our Tier 3 tires, as well as our increase of self-funded tire promotions. Going forward, then, we expect similar pressure related to those material costs, given that consumer trade-down and higher levels of promotional activity. So we remain committed to sales unit growth and improving our customer accounts. And we're going to continue to make necessary price and promotional investments, which we believe this current environment requires.

Got it. Good to hear. And my follow-up question is just around the weather. You mentioned pressure in January because of the weather. Looking back at the full fiscal third quarter, do you think weather was a net benefit or a drag or neutral?

Seth, good morning. It's Mike. I would say the third quarter it was neutral and I would say what we experienced in January, the extreme weather, I think it's a good setup going forward, just like it has been. I've been looking for a winter and we got it. Although we had some disruptions with closed stores that affected our January results, mostly focused on tire, we had momentum coming out of December. And our service categories, all our major service categories, including brakes, were actually up. and stayed up. So I would say that we have a good setup with winter and a good setup. Really, the sequential improvement of our sales and our team performance is obviously will take us through Q4 and beyond.

Got it. Thanks a lot. I'm great to see the progress. Thanks, Seth. Thank you.

Thank you. Our next question comes from David Larks from Wells Fargo. David, please go ahead.

Hey, good morning, guys, and thanks for taking my questions. So it seems like you're seeing the digital courtesy inspection drive some improvement in service categories. I was curious if you could parse out some of the benefits in a bit more detail and how we should think about the drivers going forward.

David, good morning. It's Mike. I've been asked on this call in the past talking about the Confidrive and what would be some of the results that we should be looking for. When I look at what Confidrive is driven and I just look at very objectively what the results are, our traffic was down, but our average ticket was up and our average ticket was up driven by our service categories. And so when I look at what we're doing, we're attaching really well. We need more customers, and that's what I'm committed to is driving our customer count, getting low single-digit growth in customers. But what the team is driving is strong attachment. I see it in batteries. I see it in alignments. I see it in ride control. This is the first time I've talked about this in that specific area. I absolutely in Q3 was disappointed in my break results, but January it actually went positive. So all my major service categories are going positive. So from walking away, Confidrive is absolutely delivering what I expected. It's a good process for our customers. It's a good process for Monroe and our shareholders.

Got it. That's helpful. And then it seems like similar gross margin pressures could continue here near term. Curious if you can help give some color around how we should think about SG&A in the fourth quarter and, you know, if there's any early guardrails for next year.

Yeah, as it relates to SG&A, as you saw, we had an increase in SG&A versus the prior year. And the driver of that really was our front shop labor costs, which we also refer to as store manager pay. And the primary driver behind that was just an investment in front shop labor to support that comfort drive inspection process. It's really important as part of the inspection process to have the right resources at the front counter. to deliver the Comfort Drive educational selling process and that guest experience. So we believe we're seeing, obviously, as Mike just commented, on the benefits of these investments in our service category sales. But going forward, we expect that our G&A expenses will continue to reflect this investment. Of course, we'll continue to find ways to drive productivity improvements in other areas of our G&A spend, but the investment in the front counter will remain.

Got it. That's helpful. Thank you.

Thank you, David. Thank you.

Our next question comes from Thomas Wendler from Stevens Inc. Thomas, please go ahead.

Hey, good morning, everyone. Good morning, Tommy. You guys saw some continued growth in the Tier 3 tires during the quarter. What does that mix look like now? And then are you still purposely steering customers towards the Tier 3 category or with some of the promotions, and is that where your self-funded promotions is focused?

Yes, Tom, this is Mike. The mix is in the high 20s on Tier 3, and I would say that we are absolutely driving the customer so they just don't go to Tier 4. There are definitely attributes of Tier 1 through 3 tires that we want to make sure that we are presenting to the customer. Just going to cheap tires doesn't feel like the right thing to do for Monroe and its customers. What I continually emphasize is the fact that when we recommend and we provide strong promotions, the customers see the benefit in that. And if they're happy with the tires, they live with it for three years, then they come back to us for other services, which are very important to me.

Perfect.

And then for my follow-up, has there been any kind of slowdown in the manufacturer-funded promotions? Not at this point in time. I would say there's nothing changing in the consumer environment, and we have... We're very focused on making sure the manufacturers come along for this journey, making sure that the industry does. All right. Perfect.

All right. Thank you for answering my questions, guys.

Thank you, Tom. Thank you.

Our next question comes from Brett Straton from Jefferies. Brett, please go ahead.

Hey, good morning, guys. Good morning. Good morning. Could you give us the breakout of a traffic comp versus price and the comp in the quarter?

Right. It's Mike, uh, low single digits down and up, uh, uh, middle single digits, uh, basically up in trial, down traffic, uh, mid single digits up in ASP, uh, mid single digits. Okay, great.

And then, um, TAB, Mark McIntyre, Could you give us an update on where you stand with a TD you picked up 9 million of the best your proceeds are they still paying that I guess what's left to collect and how's their situation just given liquidity challenges.

TAB, Mark McIntyre, yeah related to a TD nothing's changed in terms of our commentary on the last call. TAB, Mark McIntyre, We still have $6.8 million of our receivable to earn out receivable owed to us. Um, that is part going on as part of the current process that they're going through. Uh, and we currently have no reserve against that as our expectation is to collect the full amount. And I would also say that our relationship with remains strong during the restructuring process and, uh, business as usual in terms of operations and deliveries to our stores.

Okay, great. And then could you talk about regional performance? You know, obviously, weather has been different across the country, but your west, southeast, northeast, and mid-Atlantic, you know, any big dispersion or anything to call out there?

Yeah, we were stronger in the south than our consolidated comp, and then in the midwest, northeast, and the west were all a little bit weaker than the consolidated comp in the quarter.

Okay, great. And I guess oil promotion trends, I think you call that self-funded promotion. I think you talked about oil promotion in the third quarter going into the fourth quarter. How do you see the broader market there? Is that category becoming more promotional as peers are trying to drive traffic as well?

I would say that the promotions have always been in place. Most of it has been focused on Monroe. We've just gotten more aggressive using our vendor partners, Boboline, making sure that we are very competitive in the marketplace. And that's what we've been focusing on starting at the end of really when we announced it in the first quarter of this year.

Thank you. Our next question comes from Brian Nagel from Oppenheimer. Brian, please go ahead.

Hey, guys. Good morning. Morning, Brian. Morning. So my question is maybe a bit repetitive, but I just want to focus on gross margin. And I think this goes back to the question Seth asked initially. But, you know, if you look at the progression in gross margin from, you know, the fiscal second quarter, well, like fiscal second quarter, fiscal third quarter, you know, the trend turned more negative or worse. So the question out there, I mean, what changed? Was it just more of an emphasis on this, you know, serving this value customer? Or is there something else at play that, you know, that caused that, so to say, incremental weakness Q2 to Q3? And then I have a follow-up.

Uh, Brian, what changed was the fact that in May, uh, Monroe and I declared on, uh, that we were going to get our tires back going into that May quarter. Uh, we were losing, we were seeding market share tier one through three and four. The customers were shifting down to tier four and we have a strong tier four offering. So it's not about availability. It's really about price. Um, and we've really leaned into our vendor partners along the way. And really, it's just a difficult consumer environment. We do see that setup improving, absolutely improving. And we made sure to get the tire business back. And that's a lot of the drag on the gross margin. At the same time, I was not seeing some of our service categories come to life. And I would say now we're starting to see those service categories coming to life. So between the vendors helping us, leaning in, protecting their brands, and monroe driving a quality inspection process and offering and selling additional services that's how we're going to restore our margin and we have that trajectory going back in a healthy place okay so you know with that mike then and i recognize that you haven't really given guidance but should from a gross margin perspective you know recognize there's a lot of moving pieces here but so should is fiscal q3

The worst of it. I mean, do you, do you, do you mean, did you perceive things getting better from here?

I would say at this point in time, I like where we came out of our service categories in January, but I don't have a crystal ball, Brian. I would say we're very focused on getting a balanced approach, very focused on getting our vendor partners on board, making sure they protect their brands, making sure that we're growing all our categories. Um, and getting our business back, getting our customers back. Um, and I really do like to see what our breaks are doing right now. And our other, the attachment strategy that we've put in place with coffee drive is starting to come to life. Um, now as how that plays out in Q4, um, I look forward to talking about that in a couple of months.

Okay. Then my, then my follow up, I guess my follow up question, uh, you know, you, you, You and Brian, you mentioned this a lot as well. Over time, taking those gross margins back to pre-COVID levels. The math right now is you're tracking three, maybe five percentage points below pre-COVID or historic peaks. What are the building blocks to get back there from where we are right now? We talked about this. There's clearly a cyclical nature with the pressures on the consumer. At least we hope it's cyclical. As you think about the bigger building blocks to get back to those historic gross margins.

I'll take that, Brian. I think the first thing that we need to see happen is we need to see the pressure on our material costs start to abate. And I think the environment needs to improve for that to occur. So we need to see the trade down impact, the level of promotional activity needs to improve. So that's first. The second piece is we need top line growth. because really the next leg up in both our technician pay as a percent of sales as well as occupancy cost percent of sales is really related to leverage, fixed cost leverage against the fixed components of both of those lines. So top line growth with some help from the consumer environment on the material costs that would allow us to pull back on promotions or start to see a reversal of the trade down are really you know, if we get a healthy dose of those two dynamics, we will see our way back to the levels you described.

Okay, we appreciate all the call. Thanks, guys.

Thank you. Our final question today comes from John Healy from North Coast Research. John, please go ahead.

Thanks for taking my question. Just wanted to ask a little bit about SG&A levels in the business. you know, poked up a little bit here in Q3, but honestly, you guys have kept those pretty stable over a long period of time. So I was just kind of wondering, you know, where we're at in that kind of cycle. And as you drive same store sales, hopefully in fiscal 26, where do you think SG&A grows relative to just that comp store sales number? Thanks.

Thanks for the question, John. Yeah, we've talked about the, the flattish. Uh, as you mentioned over the last few years, really driven by our back office optimization initiatives, uh, which allowed us to, you know, completely offset the effects that inflation had on our, our GNA costs. Um, they did deliver on the lower sales levels, but on an absolute dollar basis statement remained relatively flat. On a previous question, I talked about the current quarter dynamics really driven by the front shop labor that we've invested in to support the comfort drive process and our expectation for that front shop labor to continue to be in place in order to continue to deliver the benefits that we're seeing in our service category top line. I think that's the biggest item that would take GNA up off of a normal uh normal and inflationary year-over-year growth next year so ultimately our goal is to make sure that that inflation growth plus the investment we're making in that front shop um you know it's obviously growing at a lower pace than our than our top line uh and that's how we're we would uh we would plan the business going forward got it makes sense and then i just want to ask a little bit about um kind of your reference earlier to some of the entire uh category tiers and

know you use the phrase tier four a little bit um was just trying to understand maybe you know if you looked at the different tiers tier one through four maybe what's the difference in price point kind of high to low and how does the margin profile from high to low kind of compare for you guys thanks i'll take that uh john i would say the in very simple terms it's about twenty dollars difference twenty to thirty dollars difference between every tier

But there's a lot of, just use that as kind of a barometer. And you make, the margin is stronger, generally, in tier one through three.

Got it. Thank you, guys.

Thank you, Darren.

Thanks.

Thank you. That is now the end of the Q&A session. So I'll hand back over to Michael Boderick 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.

This concludes today's call. Thank you for joining everyone. You may now disconnect your lines.