Monro, Inc. (NASDAQ:MNRO) Q3 2024 Earnings Convention Name January 24, 2024 8:30 AM ET
Firm Contributors
Felix Veksler – Senior Director, Investor Relations
Michael Broderick – President and Chief Government Officer
Brian D’Ambrosia – Government Vice President and Chief Monetary Officer
Convention Name Contributors
David Lantz – Wells Fargo
Bret Jordan – Jefferies
Brian Nagel – Oppenheimer
Joe Enderlin – Stephens Inc.
Operator
Good morning, women and gents, and welcome to Monro Inc.’s Earnings Convention Name for the Third Quarter of Fiscal 2024. Presently, all members are in a listen-only mode. Later we’ll conduct a question-and-answer session and directions will comply with at the moment. [Operator Instructions] And as a reminder, this convention name is being recorded and might not be reproduced in entire or partly with out permission from the corporate.
I would now prefer to introduce Felix Veksler, Senior Director of Investor Relations at Monro. Please go forward.
Felix Veksler
Thanks. Hi there everybody, and thanks for becoming a member of us on this morning’s name.
Earlier than we get began, please notice that as a part of this name, we might be referencing a presentation that’s obtainable on the Buyers part of our web site at company.monro.com/traders.
If I might draw your consideration to the Protected Harbor assertion on slide two, I’d prefer to remind members that our presentation contains some forward-looking statements about Monro’s future efficiency. Precise outcomes might differ materially from these recommended by our feedback at present. Probably the most vital components that would have an effect on future outcomes are outlined in Monro’s filings with the SEC and in our earnings launch. The corporate disclaims any intention or obligation to replace or revise any forward-looking statements, whether or not because of new info, future occasions or in any other case, besides as required by legislation.
Moreover, on at present’s name, administration’s statements embody a dialogue of sure non-GAAP monetary measures, that are meant to complement and never be substitutes for comparable GAAP measures. Reconciliations of such supplemental info to the comparable GAAP measures might be included as a part of at present’s presentation and in our earnings launch.
With that, I would like to show the decision over to Monro’s President and Chief Government Officer, Michael Broderick.
Michael Broderick
Thanks, Felix and good morning, everybody. I would prefer to spend the primary a part of our name this morning strolling by means of our third quarter efficiency, which mirrored prime line outcomes that have been challenged.
This was as a consequence of milder climate in addition to a pressured low to center earnings shopper that continued to defer purchases in our excessive ticket tire class. This was clearly evidenced by an industry-wide slowdown in tire unit gross sales within the areas of the nation the place a overwhelming majority of our retailer footprint is concentrated. We continued to mitigate the impression of this slowdown with actions to cut back non-productive labor prices. Regardless of a troublesome macroeconomic surroundings, the resiliency of our enterprise mannequin and the actions that we have taken allowed us to broaden gross margin within the quarter.
I am going to additionally focus on our plans to ship an enchancment in our diluted earnings per share this fiscal yr regardless of among the shopper associated headwinds that we and others in our {industry} are experiencing.
Earlier than I get began, I would like to acknowledge and thank all our teammates for serving the wants of our prospects.
Now, turning to our third quarter outcomes. Our third quarter comparable retailer gross sales declined roughly 6% from the prior yr interval. Comp retailer gross sales in our 300 small or underperforming shops have been per our total comp within the quarter. As I said earlier, our gross sales ends in the quarter proceed to be challenged by shopper deferrals of tire purchases as evidenced by an industry-wide slowdown in tire unit gross sales. This led to pressured retailer visitors which was not supportive to gross sales of our larger margin service classes within the quarter.
Whereas our tire models have been down roughly 14%, leveraging the power of our producer funded promotions allowed us to optimize our assortment for improved tire profitability within the quarter. And whereas continued shopper commerce down dynamics led to a better proportion of decrease margin opening value level tires inside total {industry} unit gross sales, we remained centered on sustaining a wholesome mixture of opening value level tires within the quarter.
Encouragingly, based mostly on retail sellout information from Torqata, a subsidiary of ATV, our tire market share remained broadly consistent with the general market in our larger margin tiers. We proceed to mitigate this industry-wide slowdown in tires with actions to cut back non-productive labor prices, together with time beyond regulation hours in our shops, which have been down 25% year-over-year. This allowed us to broaden gross margin even on decrease gross sales volumes. We’ll proceed to carefully handle our labor prices and expense to maximise profitability.
Now, concluding with our plans to ship an enchancment in our diluted earnings per share this fiscal yr, regardless of a uneven shopper surroundings. Whereas our preliminary comp retailer gross sales for fiscal January are down roughly 6% as a consequence of softness within the first half of the month, comps have accelerated materially within the final two weeks with the return of regular seasonal climate.
Now we have some simpler prior yr compares in February and March. However given the present pressures on the buyer, we now not count on to develop full yr gross sales. Nonetheless, we do count on full yr diluted earnings per share to be larger versus prior yr. This might be pushed by actions we have taken to efficiently reposition our value construction, in addition to increasing our gross margin by means of correctly coaching our teammates to maximise their productiveness and optimizing our tire assortment for improved profitability.
We’ll proceed to stay relentlessly centered on bettering our 300 small or underperforming shops, sustaining a balanced strategy between our tire and repair classes with aggressive pricing to drive retailer visitors, and repeatedly bettering our buyer expertise. As well as, we’ll proceed to create money by optimizing stock and leveraging the power of our vendor companions for higher availability, high quality, and price of components and tires in our shops.
In closing, regardless of the challenges posed by the present macroeconomic surroundings, our enterprise continues to be effectively positioned, and we’re assured that we stay on a path to revive our gross margins again to pre-COVID ranges with double-digit working margins over the long run.
With that, I am going to now flip the decision over to Brian, who will present an outline of Monro’s third quarter efficiency, sturdy monetary place, and extra shade relating to the rest of fiscal 2024.
Brian?
Brian D’Ambrosia
Thanks, Mike and good morning, everybody. Turning to slip eight. Gross sales decreased 5.2% year-over-year to $317.7 million within the third quarter, which was primarily as a consequence of decrease tire unit gross sales. Comparable retailer gross sales decreased 6.1%, and gross sales from new shops elevated roughly $1 million.
Gross margin elevated 170 foundation factors in comparison with the prior yr, primarily ensuing from decrease materials prices and technician labor prices as a share of gross sales, which have been partially offset by larger distribution and occupancy prices as a share of gross sales.
Whole working bills have been $91.3 million, or 28.7% of gross sales, as in comparison with $89.6 million, or 26.7% of gross sales within the prior yr interval. The rise as a share of gross sales was principally as a consequence of decrease year-over-year comparable retailer gross sales.
Working earnings for the third quarter declined to $21.4 million, or 6.7% of gross sales. That is in comparison with $23.8 million, or 7.1% of gross sales within the prior yr interval. Web curiosity expense decreased to $5 million, as in comparison with $5.9 million in the identical interval final yr. This was principally as a consequence of a lower in weighted common debt.
Earnings tax expense was roughly $4.2 million or an efficient tax price of 25.8%, which is in comparison with $5 million or an efficient tax price of 27.6% within the prior yr interval. Web earnings was roughly $12.2 million as in comparison with $13 million in the identical interval final yr.
Diluted earnings per share was $0.38 in comparison with $0.41 for a similar interval final yr. Adjusted diluted earnings per share, a non-GAAP measure, was $0.39. And that is in comparison with adjusted diluted earnings per share of $0.43 within the third quarter of fiscal 2023.
Please discuss with our reconciliation of adjusted diluted EPS on this morning’s earnings press launch, and on slide eight in our earnings presentation for additional particulars relating to excluded gadgets within the third quarter of each fiscal years.
As highlighted on slide 9, we proceed to take care of a really strong monetary place. We generated $130 million of money from operations throughout the first 9 months of fiscal 2024, together with $30 million in working capital reductions. This has decreased our money conversion cycle by roughly 60 days on the finish of the third quarter in comparison with the prior yr interval. Our AP to stock ratio on the finish of the third quarter was 179% versus 178% on the finish of fiscal 2023. We acquired $16 million in divestiture proceeds, and we invested $19 million in capital expenditures, spent $29 million in principal funds for financing leases, and distributed $27 million in dividends.
Lastly, repurchases of our frequent inventory have been roughly $44 million below our share repurchase program, which authorizes us to repurchase as much as $150 million of the corporate’s frequent inventory. We have used our vital money movement to cut back invested capital by $83 million throughout the first 9 months of fiscal 2024. On the finish of the third quarter, we had financial institution debt of $94 million, money and money equivalents of $24 million, and a internet financial institution debt to EBITDA ratio of 0.5 occasions.
Whereas we’re not offering steerage for the rest of fiscal 2024, we’re offering shade to help in your modeling. We count on decrease year-over-year full yr gross sales, inclusive of an additional week in our fourth quarter. We count on to drive year-over-year enhancements in our gross margin by means of pricing actions, tire combine optimization, and productiveness enhancements from our labor investments, which might be partially offset by continued wage inflation.
Whole working bills on the share of gross sales are anticipated to be larger year-over-year as a consequence of will increase in direct and departmental prices to help our retailer base, in addition to the impression of inflation and decrease gross sales quantity. Our tax price needs to be roughly 25% for fiscal 2024.
Concerning our capital expenditures, we count on to spend roughly $30 million to $35 million in fiscal 2024. We additionally count on to proceed bettering our working money movement pushed by continued working capital reductions. Our balanced strategy of returning capital to shareholders by means of dividends and share repurchases, in addition to opportunistically finishing value-enhancing acquisitions, is predicted to meaningfully enhance our return on invested capital.
And with that, I’ll now flip the decision again over to Mike for some closing remarks.
Michael Broderick
Thanks Brian. We stay laser-focused on our initiatives to enhance gross sales, broaden margins, and create money. Though we nonetheless have necessary work to do, we’re well-positioned to execute our progress technique and ship long-term worth creation for our shareholders.
With that, I’ll now flip it over to the operator for questions.
Query-and-Reply Session
Operator
Thanks. [Operator Instructions]
Our first query comes from David Lantz from Wells Fargo. Please go forward.
David Lantz
Hey, good morning, guys. Thanks for taking my questions. So, I used to be simply curious in case you might discuss in regards to the quarter-to-day comp developments in a bit extra element. It seems like the primary half of January was fairly difficult, however the second half has improved so much, so I used to be simply interested in that.
Michael Broderick
David, good morning. That is Mike. Simply to provide you readability on what we’re seeing, the primary two weeks have been very comfortable, pushed by a shift within the vacation. So, I principally gained two Sundays, however misplaced two crucial Mondays, and I do far more enterprise on Monday, in order that contributed to a comfortable comp. After which it was only a continuon of a climate story and the tire story.
As quickly because the climate got here again, which occurred within the final two weeks of the month, every part normalized. Our tire enterprise got here again. Our enterprise turned in a really completely different place. And the way in which we characterised it was a major distinction between the primary two weeks and the second two weeks.
David Lantz
Received it. That is useful. After which gross margins have been a standout within the quarter, so I used to be simply curious in case you might discuss by means of what’s structural there and what number of a lot — what number of time beyond regulation hours it’s important to scale back nonetheless and what sort of lever that may very well be.
Michael Broderick
Positive. That is Mike once more. Simply — once you take a look at the fabric margins, that partly was contributed to the selections we made across the change in our tire assortment. So, the group actually did a pleasant job bringing to life our tier one by means of three as we have talked about up to now. That was a extra worthwhile tire, higher tire for our buyer.
Quantity two is once we take a look at the tire decline, clearly our service classes drive a better margin, in order that contributed to it. And final however not least, the group did a very nice job of controlling payroll.
Whenever you take a look at time beyond regulation, truly we have been down year-over-year, however sequentially we truly invested in time beyond regulation in an effort to meet among the buyer calls for. And I actually take note of that as a result of I by no means wish to cap our gross sales. So, we have talked about this up to now. I am going to put money into time beyond regulation. I am going to put money into our individuals in an effort to meet demand. And I proceed to try this, however in the end what we’re centered on is non-productive payroll, ensuring our technicians are incomes their honest wages and our prospects are being served.
Brian D’Ambrosia
Simply to comply with up on that to provide — put some numbers to the items that Mike described, the fabric value profit was about 190 foundation factors within the quarter for the explanations Mike defined. The technician profit, technician labor value as a % of gross sales improved 40 foundation factors year-over-year. And we did see a 60 foundation level headwind associated to distribution and occupancy prices as they delevered on decrease comp gross sales. That nets out to the 170 foundation level margin enchancment.
David Lantz
Received it. Thanks guys. That is tremendous useful.
Michael Broderick
Thanks David.
Brian D’Ambrosia
Thanks.
Operator
Our subsequent query is from Bret Jordan at Jefferies. Please go forward.
Bret Jordan
Hey, good morning, guys.
Michael Broderick
Good morning, Bret.
Bret Jordan
May you escape — within the composition of automotive rely versus value?
Michael Broderick
Positive. After we take a look at our total automotive rely, it was down 8%. Value was up, common gross sales value was up 3%. Let me go deeper into that. On tire, we have been down 14% in models, up 5% in ticket. As soon as once more, going again to our combine change that we began final January.
After I take a look at our service enterprise, it was principally down 3% and common ticket was flat. I do wish to name out this P&L would look a lot completely different, a lot completely different if we ran down 3%. The group is doing a superb job controlling bills, contributing — shifting our margins in the precise path. And I really feel assured that now that we now have many of the OPP tire dialog behind us, now we have lapped it a yr, I really feel assured we get again to a extra regular dialog round our tire assortment. And I am trying ahead to a extra regular buyer surroundings the place we get this factor rising once more.
Bret Jordan
Okay. After which the contribution from working capital, type of what’s left in that tank so far as incremental money to squeeze off the steadiness sheet?
Brian D’Ambrosia
Yeah. Bret, as we talked about on the final name, we’re within the later innings of that, however there’s nonetheless alternative. So, we expect that our money movement will proceed to be supported by not solely the revenue progress, but additionally working capital enhancements. Actually do not count on to provide again any of that working capital and imagine that there is extra profit to return.
Bret Jordan
Okay. And Brian, might you give us the month-to-month prices?
Brian D’Ambrosia
Positive. Down 5.7% in October, down 6.6% in November, down 5.6% in December, after which the preliminary January month up to now down 6%.
Bret Jordan
Okay. Nice. Thanks.
Operator
Our subsequent query is from Brian Nagel at Oppenheimer. Please go forward.
Brian Nagel
Hey, guys. Good morning.
Michael Broderick
Good morning, Brian.
Brian Nagel
I assume my first query might be a little bit of a follow-up. However simply with regard to climate, I imply, look, it is no secret that we had a heat begin to the winter, so to say. However might you assist us perceive higher the precise impression of that upon comp gross sales?
After which additionally, you referred to as out once more the sluggish shopper. I imply, possibly we’re beginning to get some alerts on the market that total shopper confidence is possibly beginning to enhance. So, the query I’ve for you is behind all this noise, are you seeing some indication that possibly along with your shopper expertise, the boldness is bettering, the delayed purchases are getting much less so?
Michael Broderick
Yeah. Brian, let me — that is Mike. Let me — I do not wish to give weekly cadence. I’d say that your entire enterprise we have talked about up to now, we have been in search of a climate occasion. I want we had it within the third quarter. We would positive have made a special outcome. However when it did come, it modified dramatically. So, similar to what we have talked about up to now, climate did contribute to a major tire change.
I’d take a look at the buyer and what we’re nonetheless seeing are prospects that used to purchase 4 tires which might be buying and selling down to 2 tires and doing one tire now. So, we’re nonetheless seeing that deferral cycle. And till I see something otherwise, I’d in all probability say the buyer is in a tough patch. I ought to be capable to see a shopper that’s changing two tires minimal. They shouldn’t be simply changing one tire. And I am simply utilizing that for example to say, hey, there’s one thing there with the buyer for these excessive ticket tires.
Brian Nagel
Okay. I respect it. Thanks Mike.
Michael Broderick
Thanks, Brian.
Operator
Our subsequent query is from Daniel Imbro at Stephens Inc. Please go forward.
Joe Enderlin
Hey, guys. That is Joe Enderlin. I am for Daniel. Thanks for taking the query.
Michael Broderick
Morning, Joe.
Joe Enderlin
Morning. Commentary within the launch says you keep share in these larger margin tiers. Nonetheless looks like some motion within the opening value level. Have you ever seen the tempo of that share motion gradual?
Michael Broderick
Properly, simply to be clear, the selections we made final January, we knew we have been going to lose market share and we have been going to surrender models in opening value level. That was a choice not simply with value, however with assortment. The one factor that we didn’t issue on, and we did not see that within the prior two years that I used to be right here, is tier one by means of three declining. That’s one thing that, as an {industry}, we’d by no means have factored in or forecasted.
After I take a look at the client conduct proper now, with out query, the client undoubtedly moved into tier 4. However total, tire models within the {industry} have been down mid single digits. So, there is a very powerful surroundings across the tire enterprise proper now, and I am trying ahead to that really coming again.
As soon as once more, going again to the buyer surroundings proper now, I’d say it is shared by all.
Joe Enderlin
Received it. That is useful. Simply as a follow-up, might you present some extra shade on how these 300 underperforming shops did versus your expectations for the quarter?
Michael Broderick
Versus expectations? They missed expectations. They really have been very per the remainder of my chain. There was numerous variability within the efficiency in these 300 shops. I’d say one-third have been extraordinarily profitable, one-third met expectations, and one-third fell in need of my expectations. And we proceed to concentrate on driving worthwhile gross sales by means of these containers.
I’ve talked about in prior quarters that having one or two transactions — extra transactions with tires might considerably change the comp on a few of these low quantity shops. Simply to type of illustrate how variable a few of these shops’ P&L and gross sales efficiency actually is.
Joe Enderlin
That is useful. Thanks, guys.
Michael Broderick
Thanks, Joe.
Operator
Our subsequent query is a follow-up from Bret Jordan at Jefferies. Please go forward.
Bret Jordan
Hey, guys. I believe you not too way back made an announcement a couple of components provide deal you probably did with a bunch. May you speak about that? Does it have any impression or materials impression on margin, or is it simply an incremental components provide deal along with those you already had with among the massive two-step guys?
Michael Broderick
There’s — we did make a deal. I’d say it is incremental, however there’s nothing on this quarter to speak about. And there isn’t any margin that I’d say could be one thing I’d name out. It simply provides our group another choice in case they’re making an attempt to search for components, to allow them to higher serve their prospects.
Bret Jordan
Okay. After which I assume slightly bit extra element on the labor value discount remark. I believe you stated it was one thing within the 40 foundation factors profit. Is it simply discount in labor hours or an absolute discount in headcount? Type of what are the large levers you may pull on the labor value aspect of issues?
Michael Broderick
Yeah. We did slightly little bit of each, however in the end what we did is we decreased hours in order that we might — and we simply actually managed hours very tightly, contemplating that we had a good gross sales surroundings. And the way in which we did that’s by means of much less individuals, however extra importantly, we simply actually restricted the hours in order that we have been actually versatile when the purchasers did come into our shops. We simply managed the schedule.
Going again a few years in the past, I’d say from a Monro perspective, we invested in instruments, scheduling instruments, to permit us to raised handle our individuals, and the group is adapting to it. They usually’re doing an important job managing our greatest value, which is our technicians.
Bret Jordan
Yeah. Nice. Thanks.
Michael Broderick
Thanks Bret.
Operator
[Operator Instructions]
Now we have no additional questions on the road, so I’ll hand the decision again to Michael Broderick for closing remarks.
Finish of Q&A
Michael Broderick
Thanks for becoming a member of us at present. This continues to be an thrilling time to be a part of Monro. Now we have a powerful basis to construct upon to create long-term worth for all our stakeholders. I stay up for preserving you up to date on our progress. Have an important day.
Operator
This concludes the convention name. Thanks all very a lot for becoming a member of. You might now disconnect your strains.