Monro Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 24, 2024

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen, and welcome to Monro Inc. Earnings Conference Call for the Q3 of Fiscal 20 24. At this time, all participants are in a listen only mode. Later, we will conduct a 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 Monro.

Operator

Please go ahead.

Speaker 1

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. Monro.com/investors. If I could draw your attention to the Safe Harbor statement on Slide 2, I'd like to remind participants that our presentation includes some forward looking statements about Monro's future performance.

Speaker 1

Actual results may differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Monro'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's 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.

Speaker 1

With that, I'd like to turn the call over to Monro's President and Chief Executive Officer, Michael Broderick.

Speaker 2

Thank you, Felix, and good morning, everyone. I'd like to spend the first part of our call this morning walking through our quarter performance, which reflected top line results that were challenged. This was due to milder weather as well as a pressured low to middle income consumer that continue to defer purchases in our high ticket tire category. This was clearly evidenced by an industry wide slowdown in entire unit sales in the regions of the country where a vast majority of our store footprint is concentrated. We continued to mitigate the impact of this slowdown with actions to reduce non productive labor costs.

Speaker 2

Despite a tough macroeconomic environment, the resiliency of our business model and the actions that we've taken allowed us to expand gross margin in the quarter. I'll also discuss our plans to deliver an improvement in our diluted earnings per share 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 our teammates for serving the needs of our customers. Now turning to our 3rd quarter results. Our 3rd quarter comparable store sales declined approximately 6% from the prior year period.

Speaker 2

Comp store sales in our 300 small or underperforming stores were consistent with our overall comp in the quarter. As I stated earlier, our sales results in the quarter continued to be challenged by consumer deferrals of tire purchases as evidenced by an industry wide slowdown in tire unit sales. This led to pressured store traffic, which was not supportive to sales of our higher margin service categories in the quarter. While our tire units were down approximately 14%, leveraging the strength of our manufacturer funded promotions allowed us to optimize our assortment for improved tire profitability in the quarter. And while continued consumer trade down dynamics led to a higher proportion of lower margin opening price point tires within overall industry unit sales, We remained focused on maintaining a healthy mix of opening price point tires in the quarter.

Speaker 2

Encouragingly, Based on retail sellout data from Torekada, a subsidiary of ATD, our tire market share remained broadly in line with the overall market in our higher margin tiers. We continue to mitigate this industry wide slowdown in tires with actions to reduce non productive labor costs, including overtime hours in our stores, which were down 25% year over year. This allowed us to expand gross margin even on lower sales volumes. We will continue to closely manage our labor costs and expense to maximize profitability. Now concluding with our plans to deliver an improvement in our diluted earnings per share this fiscal year despite a choppy consumer environment.

Speaker 2

While our preliminary comp store sales for fiscal January are down approximately 6% due to softness in the first half of the month, Comps have accelerated materially in the last 2 weeks with the return of normal seasonal weather. We have some easier prior year compares in February March, but given the current pressures on the consumer, we no longer expect to grow full year sales. However, we do expect full year diluted earnings per share to be higher versus prior year. This will be driven by actions we've taken to successfully reposition our cost structure as well as expanding our gross margin through properly training our teammates to maximize their productivity and optimizing our tire assortment for improved profitability. We will continue to remain relentlessly focused on improving 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.

Speaker 2

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, despite the challenges posed by the current macroeconomic environment, our business continues to be 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 Monro's 3rd quarter performance, strong financial position and additional color regarding the remainder of fiscal 2024. Brian?

Speaker 3

Thank you, Mike, and good morning, everyone. Turning to Slide 8, sales decreased 5.2 percent year over year to $317,700,000 in the 3rd quarter, which was primarily due to lower tire unit sales. Comparable store sales decreased 6.1% and sales from new stores increased approximately $1,000,000 Gross margin increased 170 basis points compared to the prior year, primarily resulting from lower material costs and technician labor costs as a percentage of sales, which were partially offset by higher distribution and occupancy costs as a percentage of sales. Total operating expenses were $91,300,000 or 28.7 percent of sales as compared to $89,600,000 or 26.7 percent of sales in the prior year period. The increase as a percentage of sales was principally due to lower year over year comparable store sales.

Speaker 3

Operating income for the 3rd quarter declined to $21,400,000 or 6.7 percent of sales. This is compared to $23,800,000 or 7.1% of sales in the prior year period. Net interest expense decreased to $5,000,000 as compared to $5,900,000 in the same period last year. This was principally due to a decrease in weighted average debt. Income tax expense was approximately $4,200,000 or an effective tax rate of 25.8 percent, which is compared to $5,000,000 or an effective tax rate of 27.6 percent in the prior year period.

Speaker 3

Net income was approximately $12,200,000 as compared to $13,000,000 in the same period last year. Diluted earnings per share was $0.38 compared to $0.41 for the same period last year. Adjusted diluted earnings per share, A non GAAP measure was $0.39 and this is compared to adjusted diluted earnings per share of $0.43 in the Q3 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 Q3 of both fiscal years. As highlighted on Slide 9, We continue to maintain a very solid financial position.

Speaker 3

We generated $130,000,000 of cash from operations during the 1st 9 months of fiscal 2024, including $30,000,000 in working capital reductions. This has reduced our cash conversion cycle by approximately 60 days at the end of the 3rd quarter compared to the prior year period. Our AP to inventory ratio at the end of the 3rd quarter was 179% versus 178% at the end of fiscal 2023. We received $16,000,000 in divestiture proceeds, And we invested $19,000,000 in capital expenditures, spent $29,000,000 in principal payments for financing leases and distributed $27,000,000 in dividends. Lastly, repurchases of our common stock were approximately $44,000,000 under our share repurchase program, which authorizes us to repurchase up to $150,000,000 of the company's common stock.

Speaker 3

We've used our significant cash flow to reduce invested capital by $83,000,000 during the 1st 9 months of fiscal 2024. At the end of the Q3, we had bank debt of $94,000,000 cash and cash equivalents of $24,000,000 and a net bank debt to EBITDA ratio of 0.5 times. While we're not providing guidance for the remainder of fiscal 2024, We are providing color to assist in your modeling. We expect lower year over year full year sales, inclusive of an extra week in our 4th quarter. We expect to drive year over year improvements in our gross margin through pricing actions, tire mix optimization and productivity improvements from our labor investments, which will be partially offset by continued wage inflation.

Speaker 3

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 and lower sales volume. Our tax rate should be approximately 25% for fiscal 2024. Regarding our capital expenditures, we expect to spend approximately $30,000,000 to $35,000,000 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.

Speaker 3

And with that, I will now turn the call back over to Mike for some closing remarks.

Speaker 2

Thanks, Brian. We remain laser focused on our initiatives to improve sales, expand margins and create cash. Although we still have important work to do, we are 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.

Operator

Thank you. Our first question comes from David Lance from Wells Fargo. Please go ahead.

Speaker 4

Hey, good morning guys. Thanks for taking my questions. So I was just curious if you could talk about the quarter to date comp trends in a bit more detail. It sounds like the first half of January was pretty challenging, but second half has improved a lot. So I was just curious about that.

Speaker 2

David, good morning. This is Mike. Just to give you clarity on what we're seeing, the 1st 2 weeks were very soft, driven by a shift in the holiday. So I basically gained 2 Sundays but lost 2 very important Mondays and I do much more business on Monday. So that contributed to a soft comp.

Speaker 2

And then it was just a continue on of a weather story and the tire story. As soon as the weather came back, which happened in The last 2 weeks of the month, everything normalized. Our tire business came back. Our business turned in a very different position and the way we characterize it was a significant difference between the 1st 2 weeks and the second 2 weeks.

Speaker 4

Got it. That's helpful. And then gross margins were a standout in the quarter. So I was just curious if you could talk through what's structural there And how much how many overtime hours you have to reduce still and what kind of lever that could be?

Speaker 2

Sure. This is Mike again. Just When you look at the material margins that is partly was contributed to the decisions we've made around the change in our tire assortment. So the team really did a nice job bringing to life our Tier 1 through 3 as we've talked about in the past. That was more profitable tire, better tire for our customer.

Speaker 2

Number 2 is when we look at the tire decline, obviously our service categories drive a higher margin so that contributed to it. And last but not least, the team did a really great job controlling payroll. When you look at overtime, actually we were down year over year, but sequentially we actually invested in overtime in order to meet some of the customer demands. And I really pay attention to that because I never want to cap our sales. So We've talked about this in the past.

Speaker 2

I'll invest in overtime, I'll invest in our people in order to meet demand. And I continue to do that. But ultimately what we're focused on is non productive payroll, making sure our technicians are earning their fair wages and our customers are being served.

Speaker 3

Just to follow-up on that to give us put some numbers to the pieces that Mike described. The material cost benefit was about 190 basis points in the quarter for the reasons Mike explained. The technician benefit, technician labor costs sales improved 40 basis points year over year. And we did see a 60 basis point headwind related to distribution cost as they delevered on lower comp sales, that nets out to the 170 basis point margin improvement.

Speaker 4

Got it. Thanks guys. That's super helpful.

Speaker 3

Thanks David. Thank you.

Operator

Our next question is from Bret Jordan at Jefferies. Please go ahead.

Speaker 4

Hey, good morning guys.

Speaker 2

Good morning, Brad.

Speaker 5

Could you break out in the composition of car count versus price?

Speaker 2

Sure. When we look at our overall car count, it was down 8%. Price was up Average sales price was up 3%. Let me go deeper into that. On tire, we were down 14% units, up 5% in ticket.

Speaker 2

Once again, going back to our mix change that we started last January. When I look at our service business, It was basically down 3% and average ticket was flat. I do want to call out this P and L would look much different, much different if we ran down 3%. The team is doing a good job controlling expenses, contributing moving our margins in the right direction. And I feel confident that now that we have most of the OPP tire conversation behind us, now we've lapped at a year, I feel confident we get back to a more normal conversation around our tire assortment and I'm looking forward to a more normal customer environment where we get this thing growing again.

Speaker 5

Okay. And then the contribution from working capital, sort of what's left in that tank as far as incremental cash to squeeze off the balance sheet?

Speaker 3

Yes, Brett. As we talked about on the last call, we're in the later innings of that, but there's still opportunity. We think that our cash flow will continue to be supported by not only the profit growth, but also working capital improvements. Certainly not can don't expect to give back any of that working capital and believe that there's additional benefit to come. Okay.

Speaker 5

Hey, Brian, can you give us the monthly cost?

Speaker 3

Sure. Down 5.7 in October, down 6.6 in November, down 5.6% in December and then the preliminary January month to date down 6%.

Speaker 5

Okay, great. Thank you.

Operator

Our next question is from Brian Nagel at Oppenheimer. Please go ahead.

Speaker 6

Hey, guys. Good morning.

Speaker 2

Good morning, Brian.

Speaker 5

I guess, guess my

Speaker 6

first question is probably a bit of a follow-up. But just with regard to weather, I mean, look, it was obviously no secret that we had a warm start to the winter, so to say. But Could you help us understand better the impact of the actual impact of that upon comp sales? Then also you called out again the sluggish consumer. I mean maybe we're starting to get some signals out there that overall consumer confidence is maybe starting to improve.

Speaker 6

So the question I have for you is behind all this noise, are you seeing some indication that maybe with your consumer confidence is improving, the delayed purchases are getting less

Speaker 2

Yes, Brian, let me this is Mike. Let me I don't want to give weekly cadence. I would say that the tire business we've talked about in the past, we were looking for a weather event. I wish we had it in the Q3, which sort of made A different result, but when it did come, it changed dramatically. So just like what we've talked about in the past, weather did contribute to a significant tire change.

Speaker 2

I would look at the consumer and what we're still seeing customers that used to buy 4 tires that are trading down to 2 tires and doing 1 tire No. So we are still seeing that deferral cycle. And until I see anything differently, I would probably say the consumers In a rough patch, I should be able to see a consumer that is replacing 2 tires minimum. They should not be just replacing one tire and I'm just using it as an example to say, hey, there's something there with the consumer for these high ticket tires.

Speaker 6

Okay. I appreciate. Thanks, Mike.

Speaker 2

Thank you, Brian.

Operator

Our next question is from Daniel Imbro at Stephens Inc. Please go ahead.

Speaker 7

Hey guys, this is Joe Enderlin on for Daniel. Thanks for taking the question.

Speaker 6

Good morning, Joe.

Speaker 7

Good morning. Commentary in the release says you maintain share in those higher margin tiers. Still seems like some movement in the opening price point. Have you seen the pace of that share movement slow?

Speaker 2

Well, just to be clear, the decisions we made last January, we knew we were going to lose market share And we were going to give up units in opening price point. That was a decision not just with price, but with assortment. The one thing that we did not factor on And we didn't see that in the prior 2 years that I was here is Tier 1 through 3 declining. That is something that as an industry, we would never have factored in or forecasted. When I look at the customer behavior right now, without question, the customer definitely moved into Tier 4.

Speaker 2

But overall tire units in the industry were down mid single digits. So, there's a very tough environment around the tire business right now and I'm looking forward to that actually coming back. Once again, going back to the consumer environment right now, I would say it's shared by all. Got it. That's helpful.

Speaker 2

Just as

Speaker 7

a follow-up, could you provide Some more color on how those 300 underperforming stores did versus your expectations for the quarter?

Speaker 2

Versus expectations, they missed expectations. They actually were very consistent with the rest of my chain. There was a lot of variability in the performance in those 300 stores. I would say 1 third were extremely successful, 1 third met expectations and 1 third fell short of my expectations. And we continue to focus on driving profitable sales through those boxes.

Speaker 2

I have talked about in prior quarters that having 1 or 2 transactions, Additional transactions with tires could significantly change the comp on some of these low volume stores, just to kind of illustrate how variable some of these stores P and L and sales performance really is.

Speaker 7

That's helpful. Thank you, guys.

Speaker 3

Thank you, Joe.

Operator

Our next question is a follow-up from Bret Jordan at Jefferies. Please go ahead.

Speaker 5

Hey, guys. I think you not too long ago made an announcement about a

Speaker 3

part supply deal you did with

Speaker 5

the group. Could you talk about that? Does it have any impact or material impact on margin? Or is it just incremental parts supply deal in addition to the ones you already had with some of the big 2 step guys?

Speaker 2

There's we did make a deal. I would say it's incremental, but there's nothing in this quarter to talk about. And there's no margin that I would say would be something I would call out. Just gives our team another option in case they're trying to look for parts so they can better serve their customers.

Speaker 5

Okay. And then I guess a little bit more detail on the labor cost reduction comment. I think you said it was something in the 40 basis points benefit. Is it just reduction in labor hours or an absolute reduction in headcount? Sort of what are the big levers you can pull On the labor cost side of things?

Speaker 2

Yes, we did a little bit of both, but ultimately what we did is we reduced hours And the way we did that through less people, but more importantly, we just really restricted the hours so that We were really flexible when the customers did come into our stores. We just managed the schedule. Going back a couple of years ago, I would say from a Monro perspective, We invested in tools, scheduling tools to allow us to better manage our people and the team is adapting to it They're doing a great job managing our biggest cost, which is our technicians.

Speaker 5

Okay, great. Thank you.

Speaker 3

Thanks, Brett.

Operator

If there are any further follow-up questions, We have no further questions on the line. So I will hand the call back to Michael Broderick for closing remarks.

Speaker 2

Thank you for joining us today. This continues to be an exciting time to be part of Monro. 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.

Remove Ads
Powered by Quartr
Earnings Conference Call
Monro Q3 2024
00:00 / 00:00
Remove Ads