Monro Inc (MNRO) 2025 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to Monro Inc earnings conference call for the second quarter of fiscal 2025. At this time, all participants are in an instant only mode later, we will conduct a question and answer session and instructions will follow at that time.

(operator instruction)

And as a reminder, this conference call is being recorded and may not be reproduced in whole or in part without permission from the Felix Veksler senior Director of Investor Relations at Monro. 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 investors section of our website at corporate.Monro.com/investors.

If I could draw your attention to the safe harbour statement on slide 2, 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 statements included 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.

Thank you, Felix for an update with you on our second quarter. Accomplishments after that, I'll outline several objectives that we plan to achieve in the third quarter.

Before I begin, I'd like to recognize and thank all of our teammates for their commitment to Monroe and our customers.

Turning to slide 3, starting with their accomplishments in the second quarter.

We drove a sequential improvement in our year over year comp store sales percentage change from the first quarter as well as a significant acceleration in our comp trends. As the second quarter progressed, our initiatives are taking hold.

We like the progress, but we are just getting started. Importantly, our entire dollar and unit sales improved sequentially from the first quarter and our tire category exited the quarter with year over year growth to leverage the strength of our manufacturer funded promotions which allowed us to meet the needs of our value-oriented consumer.

And although our higher margin service categories as shown on July '4, our comfort drive digital courtesy inspection allowed us to drive sequential improvement from the first quarter in our service category sales as well as year over year growth in both battery units and sales dollars in the quarter.

Additionally, we improved our attachment rate for alignment which resulted in year over year growth in both alignment units and sales dollars in the month of September.

Consistent with general industry trade down by a value oriented consumer that traded down more of their tire purchases to our tier three offerings. And while this tire makes pressured material margins in the quarter, we continue to drive labour optimization and efficiencies through productivity improvements including scheduling training and our attachment selling initiatives.

Now on to our objectives for the momentum from the second quarter has continued into fiscal October. With our preliminary comp store sales down only 1% supported by improving trends in tires and all service categories including bras, excluding the impact of hurricanes, Helene and Milton. Our preliminary comp store sales would have been approximately flat compared to the prior year.

We expect to leverage this momentum to achieve our third quarter objectives which include improving store traffic trends driven by a keen focus on oil change services as well as continued growth. Entire units accelerating the performance of our key service categories utilizing the benefits from comper drive and optimizing labour 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 first quarter and accelerated as the second quarter progressed. This was led by our entire category which exited the quarter with year over year unit growth in September.

While we have more work to do to improve the performance of our higher margin service categories, we drove a sequential improvement in service category sales from the first quarter year over year growth in batteries in the quarter and year over year growth in alignment in the month of September. This service is evidence that our initiatives are working and although our gross margin took a step back in the quarter, 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 as we return to top line growth, our sales momentum in October as well as to achieve our third quarter objectives.

And with that, I'll now turn it over to Brian who will provide an overview of Monro's second quarter performance, strong financial position and additional colour regarding fiscal 2025 Brian.

Thank you, Mike. Our year over year comparable store sales percentage change improved 410 basis points sequentially from the first quarter of fiscal 2025 resulting in sales of $301.4 million sales decreased 6.4% year over year, which was primarily driven by a 5.8% decline in comparable store sales.

As Mike just walked through, we drove a significant acceleration in our comp store sales trends as the quarter progressed for reference comps were down 8% in July followed by an improvement to down 6% in August. And we exited the quarter down 3% in September while year over year tire units were flat.

In the second quarter. We exited the quarter with low single digit growth in units during the month of September.

We also gained higher market share in our higher margin tiers in the quarter, comp store sales and our 300 small or under turning to slide, six gross margin decreased 40 basis points compared to the price/cost due to mix within tires and higher fixed occupancy costs as a percentage of sales partially offset by lower technician labour costs as a percentage of sales.

Total operating expenses were $93.2 million or 30.9% of sales. As compared to $92.6 million or 28.8% of sales in the price of sales was principally due to lower year over year comparable store sales and an increase in advertising spend operating income for the second quarter declined to $13.2 million or 4.4% of sales. This is kind of sales in the prior year period.

Net interest expense increased to $5.1 million as compared to $4.8 million in the same period last year. This was principally due to an increase in our weighted average interest rate.

Income tax expense was $2.5 million or an effective tax rate of 30.9%, which is compared to $4.7 million or an effective tax rate of 26.8% in the prior year period.

The year over year difference in effective tax rate is primarily due to state taxes and discrete tax impacts related to share based awards.

Net income was $5.6 million as compared to $12.9 million in the same period last year, diluted earnings per share was 18¢. This is compared to $0.40 for the same period last year adjusted diluted earnings per share. A non-GAAP measure was $0.17, and this is compared to adjusted diluted earnings per share of $0.41 in the second quarter of fiscal 2024.

Driving the 24% difference in adjusted diluted earnings per share was the 5.8%. As a reminder, every 1% change in quarterly comp store sales represents about $0.4 of adjusted diluted earnings per share.

Please refer to our reconciliation of adjusted diluted E 10 slide 10 in the appendix to our earnings presentation. For further details regarding excluded items in the second quarter of both fiscal years,

As highlighted on slide 7, we continue to maintain a strong financial position. We generate including $38 million of working capital reductions during the first half of fiscal 2025.

Our AP to inventory ratio improved further at the end of the second quarter to 185% 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 $14 million in capital expenditures, spent $20 million in principal payments for financing leases and distributed $17 million in dividends.

At the end of the second quarter, we had net bank out of $41 million and a net bank debt to EBITDA ratio of 0.3 times and total equipment.

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 half 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 conference drive, digital courtesy inspection process and our 300 small or underperforming stores as well as our relentless focus on improving the customer experience are setting us up for improved financial performance.

Now turning to our expectations for the full year of fiscal 2025 on slide 8 for full year fiscal 2025 we continue to expect gross margin expansion versus 2024. We also believe our fixed occupancy costs within cost of goods and operating expenses will be approximately flat on a dollar basis. When compared to the prior year.

Please note that fiscal 2025 is a 53 week year that benefited from an extra week of sales in the fourth quarter.

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 including our dividend during fiscal 2025.

Regarding our capital expenditures, we expect to spend $25 million to $35 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 foundational progress to expand margins in the first half of fiscal 2025.

As well as our cash flow generation will enable Monro to reap benefits as tire volumes continue to recover. We are poised to win with our scale strategic relationships and our experienced management team with that I will now turn it over to the operator for questions.

Thank you. If you would like to ask a question. (Operator instruction)

Our first question comes from Thomas Wendler from Stephens.

Hey good morning, everyone.

Good morning, Thomas.

Good morning. I just, I just wanted to touch on the American tire distributors bankruptcy filing. I think your contract with them requires you to purchase 90% of your tires and then you still have a $6.8 million earn out from them. Can you just kind of give us the idea of the impacts there that you're expecting.

A short time? This is Mike, there is no impact that right now business as usual and they're a big key to supporting us growing our tire category. So, we have nothing to report anything differently than what's been filed. We're just acting as a great customer.

Okay. Yeah, thank you for that. And then kind of shifting gears. I think you; you mentioned a mix shift to Tier 3. The Tire mix shook out between the different tiers.

Yeah, sure. The Tier one and Tier 2 differently shifted down to Tier 3. We grew approximately 30%. The in Tier 3 and 30% that's probably the biggest outlier when you look at the category. Nothing's really changed in the tire business. It's still the customers are trading down. I would say without question, everything that we see. We're gaining market share in tier one through three. Using our vendor vendors to support us with their promotions. Industry is still selling a lot of inexpensive Tires at Tier 4. We are also participating in tier four. We're just doing it in a more balanced approach. I think it's good for units where we're showing that we're improving our units.

It's good for protecting the ASP and I think it's a better value for the customer all at the same time.

That was great. I appreciate you guys answering my questions. Thank you.

Thank you. Our next question comes from David Lantz from Wells Fargo. David. Please go ahead.

Hey, good morning, guys and thanks for taking my questions. Can you talk about the buckets within gross margin in a bit more detail and then any colour you can provide around how to think about the second half would be helpful as well.

Sure David, if you if you look at the bucket's material costs was the biggest pressure in the quarter. Tire margins were negatively affected by the trade down. We just discussed from tier one and tier two tire margins. Was just the way manufacturer rebates are landing, we had lower manufacturer webs recognizing the quarter primarily related to lower tire purchases over the last few quarters and then also contributing to overall material margin pressure was the higher mix of tires relative to our service categories, especially breaks.

Contributing also to the decrease year over year with 60 bets related to de leverage occupancy costs were relatively flat versus the prior year. But on the lower sales value, they delivered offsetting. That was a partially offsetting, that was 100 bits and 30 bits of technician payroll productivity which we continue to see and deliver versus the prior year as it relates to the back half of the year. Without getting into specific kind of call for the back half, I can explain the forces that are at work.

So when we think about material cost is going to continue to look for value, so that dynamic doesn't change in the back half, but we do expect related to the tire purchasing rebates that that will abate in the back half is our tire purchases over the last couple of quarters have been much more supportive to higher rebates in the back half.

And then also as we're making significant improvement in our service category to deliver top line, and we'll gain leverage on those fixed costs. And then as it relates to technician pay, as we've said for a while, now, we continue to deliver good productivity, but we are starting to lap the, the good performance of the prior year. So, we think technician productivity gains year over year will still be there. They'll just be diminishing in terms of the size relative to the prior year.

Got it, that's helpful. And then just for the overall business, could you talk about traffic and ticket trends in the quarter?

Davis Mike, the, when you look at everything improved in the quarter month, over month, over month, that's one thing. And going into October, that's one thing. And it's across the board. We, we declared that we're going to get our tire business back, we got the tire business back. We're going to get our oil business back. We're going to get our brakes business back and we're seeing it in the results when you look at the high single digits, 9% in customer decline. And we did have some ASP to offset that.

Got it. That's helpful. And then last question for me, you paid down about $50 million in debt this quarter. So curious if you have any colour on, on how to think through interest expense going forward?

Sure, a lot of our interest expense is related to our financing leases. So that, you know, roughly $290 million of finance lease that generates a good portion of that. But we are seeing reductions as we're bringing the debt down, we would expect in the, in the back half of the year for interest expense to be fairly consistent with where it was in the prior year.

Great.

Thank you.

Thanks, David.

Thank you. The next question comes from Bret Jordan from Jefferies. Brett. Please go ahead.

Hey, good morning, guys.

On the, on.

The ASP tail winds, I guess. Could you sort of give us some colour? I mean, it sounds like the tier three tire shift would not be able to tail into ASP, but obviously real strength in batteries and maybe what do we do? What do you attribute that to? And where did you see other price offset to the negative traffic count?

Yeah, I would say that it definitely the shift from Tier 1 to Tier 2 and two down to three and four puts pressure on ASP. We are and we feel like that is that's a good guy coming moving forward into the quarter. I mean, we really reversed the significant traffic decline and Tire decline in our, in our organization. And we're going to be doing that across the board. I would say, from a Tire perspective, we're going to continue even though the marketplace is not that healthy, still not that that healthy. I would say a lot of what we're doing at Monroe is going to help us continue the tire trend. Second part, big part of the equation. When you look at the service categories, I really like our batteries and how they're performing. I know I like the alignment business. The big call out really is all about where's breaks. And I would say that's the biggest opportunity. It's a big-ticket item. So, it's.

Okay. And I guess in October how is the traffic versus price in that minus cup1?

Yeah, we're, we're continuing to see the, the comp led by a price mix but with the improving traffic trends.

Okay.

Alright, great. Thank you.

Thanks, bye.

The next question comes from Brian Nagel from Oppenheimer, Brian. Please go ahead.

Hey guys, good morning,

good morning, Brian.

So my the question I have and you know, I just want to understand better, I guess to sort of say the dynamic in the quarter between gross margin and top line because if you look, you know, I know, I know you addressed this a bit already, but I mean, the gross margin, the trajectory shifted dramatically to the negative and what we see in the prior quarter. So I guess the question I have initially is as we think about this, you know, improving, strengthening, solidifying top line trend is, is to some extent that coming at the expense of gross margin.

And as a follow up to that, you know, as we look to think about the business going forward, I mean, do you see a path towards, you know, simultaneous improvement in comps and gross margins or is there going to be, would there be this ongoing trade off.

I can address that Brian, I mean that we're operating in and that trade down dynamics impact on our material margins as well as you know, the level of, of both manufacturer funded and self-funded promotions that we're using to continue in terms of our stores to buy tires.

So that is pressure at this period in this period of time on the old kind of those high [37.88%] really relies on that dynamic improving. So, there's not a trade-off between top line and our material margins, but there is a promotional trade down dynamic at work that's affecting it during this particular period of time. \

Also, at the same time, we're improving our service care, another lever where we see improved path towards higher gross margins. But in this particular quarter, with, you know, breaks down 12 and with Tires only down four, that was, that was a headwind to this quarter with another item that we expect in order to achieve those 38% gross margins.

we need to continue to improve like the progress we made at the occupancy costs, you know, turn positive in terms of comps would take that 60 bits of occupancy cost of headwind and obviously turn it into a tailwind. So that's the way we think about the bridge up there.

But it's certainly I don't want to downplay the margin pressure created by the mix effect in the trade down that the value oriented the rumour is, is acting upon.

That's helpful. Brian maybe just a follow up to that then so again, sorry for, you know, the labour on this. But if you look at this was Q fiscal Q2, if you go back to fiscal Q1, you know, so I think if I recall correctly, there was also an improving, you know, sales trajectory in that period. But then the gross margins were you're on here about stronger. So, what, what, what changed, what was the primary change then? From in that dynamic from Q1 to Q2?

Yeah, the, the primary change I would say would be the material margins and the tier one and two to Tier 3. So up until that point, we really hadn't seen is that much pressure on Tier 1 and Tier 2.

We were really protecting a lot of our trade down and trying to preserve that tier three versus tier four mix which we did in the quarter, we grew tier one through three relative to the industry. But at the same time in the quarter, we saw Tier one and two trade down to tier three. That was the primary difference between Q1 and Q2.

And at the same time, we're starting to laugh also the benefits of some of that technician pay improvement. So that while that was a 240-basis point win for us if you think that that's.

You're very helpful. I appreciate it. Thank you.

About this morning.

Yes, thank you.

We have no further questions. So, I'll now hand back over to Michael Broderick 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. 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 line.