Monro Inc. (MNRO) disclosed a mixed performance in its third-quarter earnings call for fiscal year 2024, facing headwinds from milder weather and consumer spending behavior. Although the company experienced a 6% decline in comparable store sales and a 14% drop in tire units sold, it managed to expand its gross margin through cost reduction measures and tire assortment optimization. Monro anticipates an increase in full-year diluted earnings per share compared to the previous year, attributing this to strategic cost repositioning and gross margin improvements. Despite the current macroeconomic pressures, the company remains optimistic about its long-term growth potential.
Key Takeaways
- Monro reported a 6% decline in comparable store sales and a 14% decrease in tire units sold.
- Gross margin expanded due to cost reduction and optimizing tire assortment, with a 190 basis points contribution from material cost benefits.
- Full-year diluted earnings per share are expected to be higher than the previous year.
- The company is focused on improving underperforming stores and maintaining a balance between tire and service categories.
- Monro is confident in its foundation for long-term value despite current macroeconomic challenges.
Company Outlook
- Monro anticipates higher full-year diluted earnings per share, driven by cost structure repositioning and gross margin improvements.
- The company remains committed to enhancing the customer experience and improving underperforming stores.
Bearish Highlights
- There was a notable decline in car count, with customers deferring purchases and opting for lower-tier tires.
- The performance of the 300 underperforming stores was inconsistent, with only one-third meeting or exceeding expectations.
Bullish Highlights
- Gross margins improved due to a change in tire assortment and higher-margin service categories.
- Monro maintains its share in higher-margin tiers despite declines in tiers one through three.
- The company reported an increase in average sales price and expects further improvements in working capital and cost reduction.
Misses
- Comparable store sales and tire unit sales both saw significant declines.
- The first two weeks of January were particularly challenging due to a shift in the holiday and soft comp.
Q&A Highlights
- CEO Michael Broderick emphasized the focus on driving profitable sales through underperforming stores.
- Broderick described the recent parts supply deal as incremental, with no significant impact on margins.
- Labor costs were successfully reduced through better management of hours and schedules.
In conclusion, Monro Inc.'s third-quarter earnings call highlighted both the resilience and challenges of the company in a dynamic market environment. While facing headwinds from weather and consumer behavior, Monro's strategic initiatives in cost management and service offerings have allowed it to maintain a positive outlook for its financial future.
InvestingPro Insights
Monro Inc. (MNRO) has demonstrated a commitment to shareholder returns, as evidenced by its impressive track record of raising dividends for 10 consecutive years, and maintaining dividend payments for 19 consecutive years. This consistency in rewarding shareholders is reflected in the company's high shareholder yield, which is a key metric for investors seeking income-generating stocks. The company's ability to sustain these payouts, even in the face of economic headwinds, speaks to its financial discipline and operational efficiency.
In terms of financial health, Monro Inc. presents a mixed picture according to recent InvestingPro Data. The company's Market Cap stands at $968.84 million USD, with a Price/Earnings (P/E) Ratio of 28.42, which adjusts to 26.21 for the last twelve months as of Q2 2024. This suggests that the company is trading at a higher multiple than the industry average, indicating investor confidence in its earnings potential. However, it's worth noting that analysts have revised their earnings expectations downwards for the upcoming period, which could impact the stock's performance. Moreover, the company's short-term obligations currently exceed its liquid assets, which may pose a liquidity risk in the immediate future.
Despite these challenges, Monro Inc. has shown strong return over the last three months, with a 21.44% price total return, signaling robust short-term investor confidence. This recent performance could be a sign of the market's positive reaction to the company's strategic initiatives and cost management efforts.
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Full transcript - Monro Muffler (NASDAQ:MNRO) Q3 2024:
Operator: Good morning, ladies and gentlemen, and welcome to Monro Inc.'s Earnings Conference Call for the Third Quarter of Fiscal 2024. 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. [Operator Instructions] 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'd now like to introduce Felix Veksler, Senior Director of Investor Relations at Monro. Please go ahead.
Felix Veksler: 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 two, I’d like to remind participants that our presentation includes some forward-looking statements about Monro’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 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. With that, I'd like to turn the call over to Monro’s President and Chief Executive Officer, Michael Broderick.
Michael Broderick: Thank you, Felix and good morning, everyone. I'd like to spend the first part of our call this morning walking through our third 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 continued to defer purchases in our high ticket tire category. This was clearly evidenced by an industry-wide slowdown in tire 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. 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 third quarter results. Our third quarter comparable store sales declined approximately 6% from the prior year period. 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 continue 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. Encouragingly, based on retail sellout data from Torqata, a subsidiary of ATV, 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. 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 two weeks with the return of normal seasonal weather. We have some easier prior year compares in February and 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. 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 third quarter performance, strong financial position, and additional color regarding the remainder of fiscal 2024. Brian?
Brian D’Ambrosia: Thank you, Mike and good morning, everyone. Turning to slide eight. Sales decreased 5.2% year-over-year to $317.7 million in the third quarter, which was primarily due to lower tire unit sales. Comparable store sales decreased 6.1%, and sales from new stores increased approximately $1 million. 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 $91.3 million, or 28.7% of sales, as compared to $89.6 million, or 26.7% 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. Operating income for the third quarter declined to $21.4 million, or 6.7% of sales. This is compared to $23.8 million, or 7.1% of sales in the prior year period. Net interest expense decreased to $5 million, as compared to $5.9 million in the same period last year. This was principally due to a decrease in weighted average debt. Income tax expense was approximately $4.2 million or an effective tax rate of 25.8%, which is compared to $5 million or an effective tax rate of 27.6% in the prior year period. Net income was approximately $12.2 million as compared to $13 million 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 third quarter of fiscal 2023. Please refer to our reconciliation of adjusted diluted EPS in this morning's earnings press release, and on slide eight in our earnings presentation for further details regarding excluded items in the third quarter of both fiscal years. As highlighted on slide nine, we continue to maintain a very solid financial position. We generated $130 million of cash from operations during the first nine months of fiscal 2024, including $30 million in working capital reductions. This has reduced our cash conversion cycle by approximately 60 days at the end of the third quarter compared to the prior year period. Our AP to inventory ratio at the end of the third quarter was 179% versus 178% at the end of fiscal 2023. We received $16 million in divestiture proceeds, and we invested $19 million in capital expenditures, spent $29 million in principal payments for financing leases, and distributed $27 million in dividends. Lastly, repurchases of our common stock were approximately $44 million under our share repurchase program, which authorizes us to repurchase up to $150 million of the company's common stock. We've used our significant cash flow to reduce invested capital by $83 million during the first nine months of fiscal 2024. At the end of the third quarter, we had bank debt of $94 million, cash and cash equivalents of $24 million, 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 fourth 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. Total operating expenses at the 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 million to $35 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 will now turn the call back over to Mike for some closing remarks.
Michael Broderick: 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. [Operator Instructions] Our first question comes from David Lantz from Wells Fargo. Please go ahead.
David Lantz: Hey, good morning, guys. Thanks for taking my questions. So, I was just curious if you could talk about the quarter-to-day comp trends in a bit more detail. It sounds like the first half of January was pretty challenging, but the second half has improved a lot, so I was just curious about that.
Michael Broderick: David, good morning. This is Mike. Just to give you clarity on what we're seeing, the first two weeks were very soft, driven by a shift in the holiday. So, I basically gained two Sundays, but lost two very important Mondays, and I do much more business on Monday, so that contributed to a soft comp. And then it was just a continuon of a weather story and the tire story. As soon as the weather came back, which happened in the last two weeks of the month, everything normalized. Our tire business came back. Our business turned in a very different position. And the way we characterized it was a significant difference between the first two weeks and the second two weeks.
David Lantz: 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 many much -- how many overtime hours you have to reduce still and what kind of lever that could be.
Michael Broderick: Sure. This is Mike again. Just -- when you look at the material margins, that partly was contributed to the decisions we made around the change in our tire assortment. So, the team really did a nice job bringing to life our tier one through three as we've talked about in the past. That was a more profitable tire, better tire for our customer. Number two 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 of 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. 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.
Brian D’Ambrosia: Just to follow up on that to give -- 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 cost as a percent of sales improved 40 basis points year-over-year. And we did see a 60 basis point headwind related to distribution and occupancy costs as they delevered on lower comp sales. That nets out to the 170 basis point margin improvement.
David Lantz: Got it. Thanks guys. That's super helpful.
Michael Broderick: Thanks David.
Brian D’Ambrosia: Thank you.
Operator: Our next question is from Bret Jordan at Jefferies. Please go ahead.
Bret Jordan: Hey, good morning, guys.
Michael Broderick: Good morning, Bret.
Bret Jordan: Could you break out -- in the composition of car count versus price?
Michael Broderick: 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% in units, up 5% in ticket. 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&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 it 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.
Bret Jordan: 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?
Brian D’Ambrosia: Yeah. Bret, as we talked about on the last call, we're in the later innings of that, but there's still opportunity. So, we think that our cash flow will continue to be supported by not only the profit growth, but also working capital improvements. Certainly don't expect to give back any of that working capital and believe that there's additional benefit to come.
Bret Jordan: Okay. And Brian, could you give us the monthly costs?
Brian D’Ambrosia: 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%.
Bret Jordan: Okay. Great. Thank you.
Operator: Our next question is from Brian Nagel at Oppenheimer. Please go ahead.
Brian Nagel: Hey, guys. Good morning.
Michael Broderick: Good morning, Brian.
Brian Nagel: I guess my first question is probably a bit of a follow-up. But just with regard to weather, I mean, look, it's no secret that we had a warm start to the winter, so to say. But could you help us understand better the actual impact of that upon comp sales? And 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. So, the question I have for you is behind all this noise, are you seeing some indication that maybe with your consumer experience, the confidence is improving, the delayed purchases are getting less so?
Michael Broderick: Yeah. Brian, let me -- this is Mike. Let me -- I don't want to give weekly cadence. I would say that the entire business we've talked about in the past, we were looking for a weather event. I wish we had it in the third quarter. We'd sure have 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. I would look at the consumer and what we're still seeing are customers that used to buy four tires that are trading down to two tires and doing one tire now. So, we are still seeing that deferral cycle. And until I see anything differently, I would probably say the consumer is in a rough patch. I should be able to see a consumer that is replacing two tires minimum. They should not be just replacing one tire. And I'm just using that as an example to say, hey, there's something there with the consumer for these high ticket tires.
Brian Nagel: Okay. I appreciate it. Thanks Mike.
Michael Broderick: Thank you, Brian.
Operator: Our next question is from Daniel Imbro at Stephens Inc. Please go ahead.
Joe Enderlin: Hey, guys. This is Joe Enderlin. I'm for Daniel. Thanks for taking the question.
Michael Broderick: Morning, Joe.
Joe Enderlin: 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?
Michael Broderick: 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 two years that I was here, is tier one through three 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 four. 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.
Joe Enderlin: Got it. That's helpful. Just as a follow-up, could you provide some more color on how those 300 underperforming stores did versus your expectations for the quarter?
Michael Broderick: 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 one-third were extremely successful, one-third met expectations, and one-third fell short of my expectations. And we continue to focus on driving profitable sales through those boxes. I have talked about in prior quarters that having one or two 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&L and sales performance really is.
Joe Enderlin: That's helpful. Thank you, guys.
Michael Broderick: Thank you, Joe.
Operator: Our next question is a follow-up from Bret Jordan at Jefferies. Please go ahead.
Bret Jordan: Hey, guys. I think you not too long ago made an announcement about a parts supply deal you did with a group. Could you talk about that? Does it have any impact or material impact on margin, or is it just an incremental parts supply deal in addition to the ones you already had with some of the big two-step guys?
Michael Broderick: There is -- 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. It just gives our team another option in case they're trying to look for parts, so they can better serve their customers.
Bret Jordan: 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?
Michael Broderick: Yeah. We did a little bit of both, but ultimately what we did is we reduced hours so that we could -- and we just really managed hours very tightly, considering that we had a tight sales environment. And the way we did that is 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. And they're doing a great job managing our biggest cost, which is our technicians.
Bret Jordan: Yeah. Great. Thank you.
Michael Broderick: Thanks Bret.
Operator: [Operator Instructions] We have no further questions on the line, so I will hand the call back to Michael Broderick for closing remarks.
End of Q&A:
Michael Broderick: 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.
Operator: This concludes the conference call. Thank you all very much for joining. You may now disconnect your lines.
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