Q3 2020 Earnings Call
Good morning, ladies and gentlemen, and welcome to the Monroe Inc. earnings Conference call for the third quarter fiscal 2020.
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I would now like to introduce MS worry Mulholland Senior Vice President General Counsel Insectarium, Andrew. Thank you. 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 the call. This morning, we will be referencing a presentation that is available on the investors section of our website.
Corporate Dot Monroe Dot Com backslash investors Backslash Investor resources.
If I could draw your attention to the Safe Harbor statement on slide two of the presentation I'd like to remind participants on this morning's call that our presentation includes some forward looking statements about monroe's future performance.
Actual results may differ materially from those suggested by our comments today.
The most significant factors that could affect future results are outlined in Monroe its filings with the FCC 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 our President and Chief Executive Officer, Brett Taunton Brett.
Thank you very good morning, everyone. Thanks for joining us well get started today with a brief overview of our third quarter results followed by an update on the progress we've made on our mcgreal forward strategy.
As illustrated on slide three we reported comps down <unk>, 0.9% in the third quarter as higher year over year ticket was offset by negative traffic.
In October and the beginning of November we performed well against difficult comparisons in the prior year.
Mild weather conditions towards the end of November and December called the slowdown across to our core northern markets. These conditions have continued into January with our comparable store sales down 4% during the month.
We do not like talking about the weather. However, it is impossible to ignore the impact it has on our business well, we're not satisfied with our financial results. This quarter, we're executing well against the areas within our control in particular, we continue to move deeper into our company transformation.
Confident we're on the right now.
We are committed to making the necessary changes across the organization to position us to deliver strong results no matter the external circumstances.
Moving onto our performance by category in the third quarter, we were down 1% year over year and tired comparable store sales as higher ticket year over year was offset by decline in car volume.
We experienced more normalized retail pricing this quarter and are focused on further refining our entire strategy to drive strength and our largest category importantly, we're on track to roll out our tire category management and pricing system beginning in the first quarter of fiscal 2021, which will enable more tightly.
Okay, and sophisticated approach to real time pricing I'll provide more details on their shortly.
Turning to our service and repair categories, we saw a 3% decline in breaks year over year falling short of a difficult comparison on third quarter last year and maintenance, we were flat well front end shocks were down 1% and alignments declined 3% year over year.
Overall, our southern markets outperformed our northern markets as expected given the mild winter weather conditions, we faced in this region.
New stores added 22.7 million in revenue during the quarter, including 20.7 million from recent acquisitions.
Regarding our gross margin performance during the quarter, we saw a decline of 20 basis points compared to the prior year period, primarily driven by the decrease in our comparable store sales, which resulted in higher fixed cost as a percentage of sales.
Our variable margin on the other have expanded due to lower year over year material cost as a percentage of sales while slightly higher than the prior year quarter technician labor as a percentage of sales decreased sequentially from last quarter. This was a good example of us executing well against the areas within our control we identified issues last quarter.
Her that arose from our transformation enter corrective action to drive improved results.
We will have additional opportunities to continue to improve results in this area as we implement our cloud based storage staffing and scheduling model towards the end of this fiscal year, which will be critical for us to see it mostly adjust the changes in demand demand dynamics without sacrificing sales.
I'd now like to turn to the progress we made an r. Murrow forward strategy, beginning with our store rebrand and Reimage initiative on slide four.
This initiative it focuses on creating a more consistent store parents well also implementing standardized in store operating procedures, which we call R. Murrow playbook. Additionally, we are rebranding select stores to a tire oriented banner were targeted demographics favor. This type of store format in order to it.
Greece tire sales without sacrificing service revenues.
During the first half of fiscal 2020, we finalized the transformations of our first group of stores, which includes 44 locations in Rochester, New York and the mid Atlantic as well as the second group, which includes 43 stores in our southern markets.
During the third quarter, we continue to scale. This initiative crossed our base and move forward with the transformation of 74 stores in four markets and 42 of our recently acquired California stores.
We have completed the transformation of the 74 stores and it's substantially completed our California stores, which are being rebranded under our tire choice Auto service centers banner to drive higher awareness for tires.
Turning to slide five I'd like to provide some additional context regarding our strategic rationale as we transform our store base.
As many of you know, we operate and to store formats are service brand stores, which generate approximately $600000 per store in annualized sales and our tire brand stores, which generate approximately 1.2 million per store and annualized sales.
Prior to any rebrand activity, we operated 555 service brand stores and 734 tire brand stores and as we work to create a nationwide chain up consistent we operated stores, we're prioritizing the higher volume tire brands throughout this process, we will be consolidated in our regional brands focused.
And on shifting our service brands over the entire brands, but lower number brands will also allow us to improve our marketing productivity when we speak to Reimaging stores. This primarily means modernizing the appearance of our stores with no associated brands range as we are making decisions regarding rebranding versus reimaging stuff.
Wars, we're leveraging our analytical model as well as taking into account our brand equity in that market.
Looking at the bottom left to the slide you can see here. The progress we have made so far we're very much in the early innings of this transformation with 203 stores substantially completed out of our portfolio. We separated these stores out between comp stores, a non comp stores, which helps us to evaluate their performance post.
Fresh.
Of our approximately 900 comp stores that we set out to transform we've completed 134 stores and of our approximately 150 Noncomp stores, we substantially completed 69 as we move forward with expanding this program across their base. We will continue to prioritize markets that we expect will drive the largest spending.
But to our sales performance and our approach we measured in order to keep sales disruption through a minimum.
Through the end of this fiscal year, we're focusing on finalizing the transformation of our recently acquired California stores well starting the transformation of approximately 80 more stores that will be completed in Q1 about why 21.
Moving onto the performance of the stores, we've completed so far to help provide some additional granularity we separated out how re branded stores have performed versus the stores that have just been Reimaged. Importantly, this data only includes comp stores have had a full quarter of performance following the completion of their transformation.
This is how we will speak.
To this performance.
Excuse me of our transform stores moving forward.
As you can see and inline with our expectations, we see a significant sales lift when we re brand stores. This shift optimizes, our brand awareness and increases our tire sales without sacrificing our service revenues.
The stores that had been Reimage were slightly down as these are located in our northern markets, which were impacted by the mild weather conditions I mentioned earlier, we believe this performance clearly highlights the strong opportunity we have in the benefits that come with a streamlined brand portfolio.
The 74 stores that we recently completed and are not included in this calculation given they have not had a full quarter post transformation, yet, but we are still we're seeing early signs of strength that these stores and are pleased with results.
While we still have a while ago two oldest program out to our entire base. The sustained performance we've seen at the stores that have completed the transformation today underscores the impact of this important initiative.
Turning to slide six and the remainder of our Monroe forward initiatives I'd like to focus my discussion on the initiatives that our top priority, which we believe will be critical to supporting our broader strategy.
And the third quarter, we began modernizing our store hi key infrastructure at all of our approximately 1300 locations. This new infrastructure enables state of the our technology, including our new digital phone and texting system, which is a major step towards improving the overall customer experience.
This system will allow us to better track customer execution, driving more consistent phone strategy and improved conversion our store infrastructure modernization will be completed by the end of the first quarter fiscal 2021, allowing us to leverage our new phone system, which will be critical to driving traffic to our stores.
Another priority for us as the optimization Burkhardt category management, we're on track and by the end of this fiscal year, we expect our new pricing software will be operational. We believe this will be critical to driving long term margin expansion by providing improved visibility into demand dynamics, allowing us to better.
To refine our assortment and execute our strategy become the number one destination for tires at any price point.
Finally, we are right on track to rollout our cloud based for scheduling model pilot by year end.
Gaining real time visibility into our labor model via the cloud will help us be more effective and strategic ensuring we are not understaffed and losing sales were overstaff. When there was a lack of demand.
Regarding our other do you mean initiatives, we have rolled out the Monroe University program to all of our teammates and are continuing to expand and enhance the course content. We've also implemented mandatory onboard training to ensure that everyone who joins our team is trained on our Monroe playbook operating procedures in order to provide a quality.
Five star experience to our customers.
Moving on to slide seven while we're very focused on the rollout of Monroe forward acquisitions remain a cornerstone of our growth strategy during the quarter. We closed the previously announced acquisitions a three companies one with 14 locations in Las Vegas, Nevada, and four in Boise, Idaho as well as to companies that include nine stores and.
Morning.
Further solidifying our growing position in the western United States. Our presence in this region allows us to better service national accounts as well as benefit from the high concentration of vehicles in this market and the potential long term consumer shift to ride sharing.
The acquisition in Nevada in Idaho, which are new states to Monroe is expected to add approximately 20 million in annualized sales representatives sales mix of 75% service and 25% tires. The acquisitions in California are expected to add approximately 25 million in annualized sales representatives sales mix.
85% service and 45% tires. These that acquisitions are expected to be dilutive to diluted earnings per share in fiscal 2020.
Overall acquisitions announced and completed in fiscal 2020 collectively represent an expected a $120 million an annualized sales.
We operate in a very fragmented industry with significant opportunities for further consolidation and we believe we are well positioned to continue to execute on our robust pipeline of attractive M&A targets. We currently have over 10, Andy a signed with opportunities ranging from five to 40 stores, which we believe.
We will allow us to maintain our leadership position in the markets, we serve well continue to expand our geographic footprint into attractive and underserved regions.
Further by continued to execute our Monroe forward initiatives, including our new brand standards in operating procedures, we expect to integrate our new acquisitions more effectively and efficiently.
Lastly, we opened one greenfield location during third quarter, bringing our total greenfield store openings to seven in fiscal 2020.
In conclusion, we are confident we're on the right track to drive future success in our business. We are in the early innings of a significant company transformation that will result in a platform capable of delivering sustainable long term growth.
We're not there yet nor do we expect our results to be linear as we move through the transformation, but we are committed to driving the necessary changes to improve our business, making the appropriate course, corrections when necessary and executing well against the areas within our control.
I'd like to thank the entire team at Monroe for their exceptional work as we execute this strategy as well as our customers and shareholders for their continued support.
With that I'll turn the call over to our executive Vice President and Chief Financial Officer, and Treasurer, Brian de Ambrosia, who will provide additional detail on our third quarter financial performance in fiscal 2020 outlook.
Thank you Brett good morning, everyone turning to slide eight in our performance during the quarter sales increased 6.2% year over year to $329.3 million driven by sales from new stores of $22.7 million, including $20.7 million from recent acquisitions partially.
Really offset by a decrease in sales from closed stores of approximately point $8 million.
Same store sales in the quarter were down 0.9% year over year, the third quarter fiscal 2020 at 89 selling days in line with the previous year period.
Gross margin decreased 20 basis points to 37.8% in the third quarter fiscal 2020 from 38% in the prior year period. This decrease was partially due to an increase in distribution and occupancy costs as a percentage of sales as we lost leverage on these largely fixed costs with lower compare.
Double store sales however, as Bret mentioned, we saw improvements in our variable margin driven by lower material costs as a percentage of sales.
Operating expenses for the quarter increased $5.5 million to $92.8 million or 28.2% of sales as compared with $87.3 million or 28.1% of sales for the prior year period. The year over year dollar increase includes expenses from 103 not news.
Stores.
Our operating income for the third quarter was $31.6 million, which increased by 2.8% as compared to operating income of $30.7 million for the same quarter last year and decreased as a percentage of sales from 9.9% to 9.6%.
Net interest expense for the third quarter increased point $2 million to $7 million as compared to $6.8 million and the same period last year. The weighted average debt outstanding for the third quarter fiscal 2020 increased by approximately $112 million as compared to the prior year period.
The increase is primarily related to an increase in financing we start recorded in connection with our fiscal 2020 acquisitions and Greenfield expansion as well as an increase in debt outstanding under our revolving credit facility to fund the purchase of our acquisitions the weighted average interest rate for the third quarter decreased by approximately one.
Hundred 40 basis points year over year, due to lower LIBOR and prime interest rates as well as lower borrowing rates associated with new leases.
Our effective tax rate was 24.1% for the third quarter compared to 15.3% for the same period last year. The year over your your increase is primarily due to a onetime income tax benefit adjustment, we realized in the prior year related to a retroactive accounting method change which was real.
Slated to certain deductions that the IRS excepted during examination of our fiscal 2016 in fiscal 2017 tax returns.
Net income for the third quarter was $18.9 million compared to $20.5 million in the prior year period diluted earnings per share for the third quarter fiscal 2020 were 56 cents compared to diluted earnings per share of 61 cents and the third quarter of fiscal 2019 Ajay.
Adjusted diluted earnings per share, which is a non-GAAP measure for the third quarter of fiscal 2020 was 60 cents, which excludes from diluted earnings per share three cents of costs related to monro forward initiatives and one side of costs related to acquisition due diligence and integration.
This compares to adjusted diluted earnings per share of 57 cents in the third quarter fiscal 2019, which excluded one incentive costs related to Monroe forwarded initiatives, one cent of nonrecurring corporate and fuel management realignment costs and six cents benefit from the onetime income tax adjustment.
For more information on this non-GAAP measure. Please see the reconciliation of adjusted diluted earnings per share to diluted earnings per share in our earnings release.
Lastly, we opened one greenfield location during the third quarter as a reminder, greenfield stores include new construction as well as the acquisition of one to four store operations Greenfield locations on average are expected to add approximately $1 million each in annual sales.
As of December 28, 2019, the company had 1289 company operated stores and 99 franchise locations as compared with 1186 company operated stores and 99 franchise locations as of December 29, 2018 during the third quarter, we added 20.
Seven company operated stores and closed not.
Turning to slide nine we continue to maintain our disciplined approach to capital allocation as we execute our growth strategy.
Our capital expenditures were $42.2 million and the first nine months of fiscal 2020 of which approximately $18 million was related to investments in our Monroe forward initiatives. We're pleased with the progress of our Monroe forward strategy, and we continue to expect an incremental $75 million and capital expenditure.
Sure is above our normal run rate over five years to support investments and story image and technology.
Additionally, accretive acquisition support.
Our growth strategy during the first nine months of the year, we spent approximately $104 million on acquisitions, including 104 store acquisitions completed as part of our Greenfield expansion strategy.
As Bret mentioned acquisitions announced and completed in fiscal 2020 collectively represent an expected $120 million in annualized sales.
I'd like to provide some additional clarity here the $120 million in sales represents the expected run rate for these stores once they have been fully integrated which as we've stated in the past is usually in year three post acquisition during years one into following the acquisition, we typically see a step down in sales given the processes.
Onboarding new stores to our model.
Moving on we continued to be committed to returning capital to our shareholders through our dividend program and paid approximately $22 million in dividends in the first nine months of fiscal 2020.
Finally, we remain focused on maintaining a solid balance sheet with ample flexibility to support our strategic growth initiatives. We entered the third quarter with strong leverage ratios and have ample room under our financial covenants, we generated approximately $125 million of cash flow from operating activities. During the first nine months of fiscal 2000.
Tony and debt under our revolving credit facility increased by approximately $59 million.
Now turning to our outlook for fiscal 2020 on slide 10, we've updated our fiscal 2020 comparable store sales guidance range to a decrease of 1% to flat to reflect the impact of our year to date performance based on the updated comparable store sales guidance and the contribution from recently.
Once we now anticipate fiscal 2020 sales to be in the range of $1.275 billion to $1.290 billion, an increase of 6.2% to 7.5% as compared to fiscal 2019 sales. This compares to the previous sales guidance range of one.
Billion $295 million to $1.315 billion, our guidance assumes relatively stable overall tire and oil costs for the balance of fiscal 2020.
Given the impact of our year to date performance, we expect fiscal 2020 earnings per diluted share to be in the range of $2.25 to $2.35, representing a decline of 5.1% to 0.8% year over year compared to $2.37 in fiscal 2019.
This compares to the previous guidance of $2.45 to $2.55.
On an adjusted basis, which is a non-GAAP measure the company expects diluted earnings per share to be in the range of $2.35 to $2.45, representing a decline of 1.7% to growth of 2.5%, which excludes from diluted earnings per share Monroe forward initiative costs and acquisition.
In due diligence and integration costs.
This compares to adjusted diluted earnings per share of $2.39 in fiscal 2019, which excluded Monroe forward initiative costs nonrecurring corporate and field management realignment costs acquisition, due diligence and integration costs and the benefit from the onetime income tax adjustment.
Acquisitions announced and completed in fiscal 2020 are expected to be dilutive to earnings per diluted share during the year.
At the midpoint of our guidance range, we expect an operating margin of approximately 10.2% interest expense to be approximately $29 million depreciation and amortization to be approximately $65 million and EBITDA to be approximately $196 million, we expect capital expenditures to be approximately 60.
Million dollars. This year. This guidance reflects an effective tax rate of approximately 23.5% and is based on 34 million diluted weighted average shares outstanding as always our guidance does not assume any future acquisitions or greenfield store openings I'll now turn the call over to brought to provide some closing remarks before we moved acumen.
Right.
Thanks, Brian we are making solid strides in the execution of our Monroe forward strategy in particular, our store rebrand and Reimage initiative. The strong results at the locations that have completed this transformation underscore our confidence in this initiative the store rebrand and Reimage program is further supported by our technological investments, which we.
Believe will help drive long term margin expansion in summary remain committed to driving the necessary changes to improve our business, making the appropriate course corrections when necessary and executing well against the areas within our control. We are excited for future and look forward to capitalizing on the attractive opportunities ahead with that I'll now turn the call over to.
The operator for questions.
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First question is coming from Brian Nagel of Oppenheimer. Please go ahead.
Good morning.
Barbara.
So I want to focus I apologize for.
Focusing on the weather here, but I do I, just want to dive deeper into.
Sales trends in the quarter.
So Fred you mentioned I think Brian do you did you on your and your prepared comments just you made some comments.
Commentary, suggesting that.
To the degree to which weather impacted the business I was worried you can drill down will further and say what that negative 0.9 comp would have been had to weather cooperated and some of the other the other metrics you're seeing that really suggests the underlying business is trending better than what we saw.
The weather affected fiscal Q3.
Yes, I'll take the first part and I'll, let Brian tip. The second part of the question Brian .
When we look at the performance in the quarter as we've talked about our northern markets certainly underperform, the southern markets and give you a little more granularity on that certainly our stores up in the northeast.
And the Midwest were where you would expect to have more exposure to weather conditions.
Like you have in the northeast certainly underperformed I guess difficult to say, what we would have done.
Certainly I think we were expecting.
Positive comps in the quarter.
Our internal expectations would have been closer to plus one plus one and a half.
I mean normalized weather conditions that we have seen in the past.
We felt really good coming out of October November given the strength of last year's performance that we were comping against.
And and Didnt get the cooperation from the weather in December that we were certainly expecting.
As I made the comments in my prepared remarks, we certainly don't like talking about the weather, Brian , but we can't ignore the fact that when 50% of our businesses tires and we have a high concentration of stores in the northeast Midwest, we're going to have outsized exposure to our our account performance.
Yes.
Brian would you mind, maybe restating the second part of your question.
Well I think I look I think you covered right maybe I'll just bounce right for follow up question, if I if I could so the guide the adjusted guidance. You mentioned. So January you were did I think a negative for now if I'm doing the math it looks as though that the adjusted guidance suggests some type of pickup that in business and in February and March.
Well I guess first question is that assumption correct and then.
The follow on question is I know, we've seen this before with your business, but what point does.
To conclude we start along we are potentially won't comment on what are the weather could still comp, but is there a point at which in the quarter, where the weather just comes to late.
Yes, so Brian your assumption is correct regarding the.
Regarding the implied comps. So if you think about Q4 at the midpoint.
Of let's say down 0.5 for the full year down 8.5 that implies Q4 of down too, which would be about February and March being down one in order to get to that down too. So that that's the dynamic at the midpoint. So there is an expectation of a have a pickup in February and March.
And Brian maybe just to comment on the second part.
Yes.
As we get deeper into the fourth quarter, our fourth quarter. The second half of the quarter in particular, I think we've become less sensitive to the weather as you transition out of so pure winter conditions into spring.
Certainly I think.
The later in the quarter you get snowfall. It certainly doesn't have the same impact on tire demand like you would find in our business. If we got snowfall in October or November consumers are pretty thrifty with their money and I believe.
Snowfall late in the season, they have a tendency to forego that first purchase and push it out till next season in particular, the other thing to call out as well as you look at our historic performance at the company.
December and January have always been the most volatile volatile months that we had to contend with and I think.
Well, we've seen in past performance here.
Trends coming out of December January don't necessarily reflect what you see in the spring.
So.
Given the the mild December January heading into.
The balance of the quarter, we feel pretty good about the guidance range we provided.
As Brian said, our midpoint assumes that on the low end of our comp sales guidance that assumes run rate coming out of January which we certainly believe we're going to be better than that as we roll into as slide 21.
Okay I appreciate all the color. Thank you.
Thanks, Brian .
Thank you. Our next question is coming from Jonathan Lemurs, BMO capital markets. Please go ahead.
Thanks.
Brett looking at your slide on the store rebranding.
The 18% performance of the rebranded stores.
I think is good.
I'm curious from your analytic model, how many years should it take a rebranded store to reach projected run rate sales.
Well if you look at looked at the top quadrant about slide Jonathan.
We've shared.
Investors, the fact that our service stores do roughly $600000 and revenue in our stores doing too. So in the case where were rebranding the service story or you're working off a base on average of 600000, and if we have seen I'll call. It double digit comp improvement offer that base you can get to imply.
Slide number certainly on how fast the river how long it would take to ramp to the full maturity equally in the average sales performance of our entire branded stores and that's one of things. It's encouraging about strategy for us is not that it's just a one time step up in sales this creates the.
Opportunity to create multiple years of.
Sustainable growth as our brand and our positioning.
Our brand related tires starts to mature keep in mind the entire purchase cycle with consumers is anywhere from two to four years.
So if we rebrand right before consumer made that decision to buy tires, we won't be relevant necessarily that consumer for two to three years out so.
So to put that on a timeline or that you're looking at three to five years to certainly mature out to average sales performance of the tire branded store.
Okay. So just to circle up on that for the stores, where your rebranding.
There's nothing about their markets.
Like you would expect that those stores.
Would have sales comparable to your existing entire brand stores of the 1.2 million is that correct.
Yeah as a general statements. That's correct I think certainly you're going to have markets that will exceed the average annual have some markets that will be lower than that and that's part of the choices that we that we may use in the analytic model, but but on average as we look across the are.
I'll say the opportunity stores that beyond the 555, I think we feel very comfortable on average that we can reached a full potential the 1.2 overtime as they mature.
Thanks.
Switching gears, Brian how much of a headwind.
To that revenue from acquisitions, where the conversions of the 42, California stores this quarter.
Yes, I mean, we had.
Some disruption there.
I would say you know.
We haven't really quantified that from a from a sales standpoint, but it's a great point Jonathan in that we have a immediately put the new stores that we acquire out in the Monroe playbook.
And then shortly thereafter, and this case about six months.
Get the Reimage in store brand standards in place.
Although the in Q3, the 42, California stores went through that.
And our substantially through that.
As of the end of Q3.
But were we haven't quantified it but it's certainly had some impact on their sales performance in the quarter.
Okay, and that 1.8 million charge from and roll forward initiatives this quarter what was that for.
Yes, it was all related to this store rebranded Reimage.
Falls into three primary buckets related to that.
The first is noncapital up items that we sign to the stores. So as we think about updated safety chains updated Bay banners updated point of sale marketing materials. All of these things to get the store initially to the standard that are not capital.
In terms of the actual work and construction done on the store. That's the first bucket. The second bucket is noncapital work, that's actually done we get into these stores and we identified noncapital repairs.
Demolition as well as some of the fixed verse replace items for example, stripping of floor and redoing a floor versus installing a new floor. Those are things that make sense economically, but you get different treatment from expense versus capital for so thats, the second bucket and the third.
Just write off of existing lease holds in the stores.
Anything from counters to maybe some existing signage that was put up as part of an acquisition. When we initially branded the stores over to a monro brand. Those are the three primary buckets that that the than at the Monroe forward initiative costs consist of.
Okay. Thanks for your comments.
Yes.
Thank you and excuse me. Our next question is coming from Bret Jordan of Jefferies. Please go ahead.
Hi, good morning, guys.
Morning.
Back to slide five I guess, if we look at 18% growth and rebranded stores. If we really sort of look at the comparable growth. There you know ex that new product lines, you're adding how's the service comp against the service cough in those stores are you seeing.
Pickup as you changed the Brad.
Yes, maybe just to clarify, though Brad I think we're actually not adding any new products to the service menu right back, but you are adding hired another store right.
Yes, just mix right. So we've even our service stores they sell tires, it's only 15% of their mix. So we're certainly seeing growth more outsized growth in other tire sales and we've had success that maintaining.
The rate of growth that we've seen on the service side, which has been part of our thesis is.
Hold on.
Through the service business that we've enjoyed that's high margin.
And then add to that more relevancy to the marketplace on tires and drive the growth through the tire category.
We're seeing growth.
On both sides.
Okay, and I guess, we look at the Reimage, how does that compare to comparable service stores in the network that hasn't been Reimaged, I guess sort of looking at again sort of apples to apples against the old stores.
Yes, I think that.
If you can figure out what stores, we're talking about there the 30 stores or Rochester, and I think yeah, Rochester stores, certainly if they have been performing quite well.
Relative to what our expectations were on Reimage, we certainly didn't expect to see double digit growth rates out of a reimage store, we set out to do this initiative.
But we were CN more positive growth, though the stores up until the last quarter given the exposure that we've had to the weather in the north but compared to other stores.
We're still pleased with what we're seeing from a customer service point of view and from a comp sale point of view relative to their peers.
Facing similar I would say market backdrop from a weather point of view.
Okay could you give us I guess started the the but the spread between the southern store comp in the northern store comp how big that Delta was it.
I mean it was it was.
A couple of hundred basis points of performance.
Okay, and I guess for housekeeping could you give us the monthly.
Yes, so we were.
One second here, Greg we were down a 1.2 in October down 1.7 in November and up 0.4 in December .
Okay and then one just this is started at the question on the supply chain side, I mean, just throw the virus into it since thats popular. These days you guys do a lot of direct sourcing.
The the white box product out of China, do you see any impact on supply chain from what's going up.
We haven't seen any to this point breadth.
Obviously working through contingency plans, which weve.
I have had to develop actually related to the the tariff issue. So we feel pretty confident that through the network of multiple supply points that we'll be able to.
Overcome any particular issues coming from the virus and certainly get my first fire as quite as an artist flights.
I'm sorry go ahead said now joking that had to get my first virus question and then there.
Yes.
Hi, Thanks, a lot guys.
Okay. Thanks.
Thank you. Our next question is coming from Rick Nelson of Stephens. Please go ahead.
Thanks, Good morning.
Hey warranted.
A follow up on the weather.
Last year I think to December January you also pointed to mild winter weather do you think this year.
Incrementally worse than the prior.
I think if you looked at.
Analyst reports that we've seen.
Talking about I guess the impact of the mild winter has had on not only our category, but I think other retail like the data would indicate that this has been more mild.
Certainly versus last year, I think we look at precipitation.
Which is very important for us the form of snow with our tire business certainly it's been a much.
More mild.
Winter this year relative to last year.
Okay.
Thanks.
Okay, Tanya partnership with Amazon.
What's you're seeing there on the install side.
And how you think your tire pricing compared to their soon.
And the tire category, our overall Im curious about what happened with units.
In the period and market share.
Yes so.
Let's start with units where units were down too.
Average selling price was up.
One.
For the for the for the quarter.
How that compares we don't have a lot of syndicated data of course, we can look too and the definitive on that we lean on I guess, our channel checks and information from our tire manufacturers that have good visibility across multiple brands and feels like similar to other companies that have.
Exposure to the North particular, northeast, which would agree that we do feel like we are probably in line with what we've picked up through suppliers and and others.
As it relates to Amazon I think we're still.
I'm pleased with our relationship with them as well as other online tire rebuilders.
We we will eventually expands the relationship then why 21 to include all stores. So we talked about last quarter priority has been.
As I mentioned on todays call.
Bleeding the tire category management pricing tool as well as the labor scheduling tool that are just for our organization I think higher priority at this stage than expanding but we are committed to expand that relationship going forward.
Related tire pricing as you know Rick I mean, it's our categories very complicated over 30000 skews that.
You need to manage effectively across multiple markets and one of the reasons why we've invested in the tire category management tool as the.
To do a couple of things one is it was much better visibility into demand dynamics defined by last this the.
Down to a skew level and by having that visibility it's going to create much more granular approach that we're going to use for pricing.
It allow us to price at the SKU level.
Our industry.
With the intent the strike that right balance between driving the right price the drive unit volume, while preserving an expanding our entire margins through right mix at right price.
Well I am encouraged were in pilot form of that now.
We will be operational by Q1 of next year.
Fully operational the rollout of that's pretty small and scales, we control our pricing centrally so small team of people will be trained up on using that system, but between now and Q1 will be testing in parallel to make certain we're confident with the results that we're seeing from system.
Yes.
Make sense.
Thanks for the color.
Well.
Thanks, Rick Rick.
Thank you once again, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad. Our next question is coming from Stephanie Benjamin of Suntrust Robinson Humphrey. Please go ahead.
Hi, Good morning, Thank you for the question.
Morning.
Good to go back I know and the prior quarter. When you started rolling out some of these store refreshes you called out.
Sure headwind to comp during that quarter really just from distraction. It would make sense is your in their kind of reworking and revamping. The stores I believe you said it was about a 70 basis point hit last quarter could you quantify that this quarter or is there a way for you to kind of break that out our did weather overshadow that.
Yeah, I think we said last quarter, Stephanie that we walked everyone kind of through the the seven step process and talked about how we were retooling it to take take.
A lot of that work or almost all that work off of the store teams. So we were able to effectively do that in Q3, we didnt expect that we were gonna have to talk about a headwind.
And we really don't have to in terms of it from disruption related to the store reimage.
I think I think the the California stores in the on the West Coast, maybe saw a little bit more and disruption just because we did put a little bit more on them based on their proximity lack of proximity to our core resources that are doing the reimage, but for the 74 comp stores those were largely I would say on disrupted.
Great and then just a follow up when we look at the tire category in General what are you seeing from this over an inflationary environment I know it was inflationary earlier this year kind of reviewing how you thought during the quarter in their expectations going forward as well.
Yes happening when you look at go back to Q2, one of things. We commented on was we saw.
Some inflationary pricing on those are the top end of the product category.
More premium brands.
The first part of the second quarter, we Didnt see a lot of movement on the low end brands. If you will opening price point of brands. We saw that change exiting Q2 and into Q3 and I think as you saw on we've made comments in her prepared remarks, we certainly feel better about pricing moving up across.
All all price points.
Relative to that point in Q3, I think our expectation for Q4 is pretty stable environment.
Around pricing, we don't expect.
Meaningful and material changes.
In the next quarter.
I think we're we're very focused now on now optimizing our internal pricing relative to the market leveraging.
Gary management pricing to what we talk to them.
Great and then just lastly from me more high level as we think through the strategy to expand just your your tires services that some of those and the mix changes that you're service stores does that just by nature.
Q, a little bit more successful the changes and whether on annual basis to your point you said on this call that it is the tire category. There if it's a more mild weather, where you don't really see the.
The volumes during that period. So does this mean that these conversations going forward whether could have a larger impact are similar to what we saw this year that may be in prior years, maybe your thoughts on that this high level would be great. Thanks much.
Yes, Thanks, Stephanie I think strategically I would that would start with us and say our strategy to grow as we'd like the business model that our stores that as a very focused menu that's focused on tires and full service.
I think you're not going to see us migrate to a tire only category as a broad sweeping strategy for all the reasons you just mentioned, we like diversification in services.
We like being very relevant on frequently purchased items like scheduled maintenance for cars and and certainly breaks and other undercar services.
I think as we increase our total business certainly we're going to pick up a little more exposure to tires as we convert more stores in the north I think to that however, I think our broader company strategy is to diversify our store footprint more into the south and out west and south.
Early in those regions of the country you don't see I think the level of volatility that comes with the tire business like you would find in the northeast and Midwestern markets.
Great that's everything for me I appreciate it okay. Thanks that makes.
Thank you. Our next question is coming from Scott Stember of CL King. Please go ahead.
Good morning, and thanks for taking my questions.
When Scott.
Following up on that last question about high level.
About weather and I know the goal here was with all this heavy lifting that you're doing right now and will be processes get to the point where.
Yes, we're not talking about weather having.
Or whether just not really trail the quarter from a comp perspective could you talk about let me just broadly speaking about how long do you think that take for us to get to that point, where weather could be a headwind, but it's not going to be a determining whether positive or negative.
From a comp standpoint.
Yes, I think given our our exposure to the northeast and as long as our store concentration is heavy in the Midwest northeast inherent in that as we pick up exposure I think due to weather.
As we don't like to talk about Scott as you said our strategy is to diversify the footprint keep continuing to grow down south and that's reflected by our acquisitions, we continue to build out, Florida, and they've expanded now into Louisiana, and a in Tennessee, and certainly out west is reflective of that desire to create more or less volatile.
Volatility in our business due to the store store footprint.
Now in our core store markets.
We don't except internally the volatility in our business and.
We're investing in technology as we talked about to help us better execute in stores through better trained people.
Skewed and better on the phones with or or phone upgrade that working currently doing all the initiatives under Monroe forward are designed to drive performance in our stores, regardless of whether but I think will help neutralize some of the impact that we see from from the volatility that comes with a snow and colder temperatures.
Got it and just last question.
I know that there are certain things like tires. So we'll see an immediate impact from from weather, but.
More on the side of mechanical parts typically you could see an impact from.
You know a warmer weather or colder weather.
A few quarters down the road is there a chance that we could see an extended negative impact on the mechanical parts side in the next couple of quarters and that's all I have thanks.
Yes, Thanks, Scott I think as we commented in the quarter or breaks were down 3% in the quarter.
Certainly we're up against strong comp from last year, but also I would say, we do sell a fair share of.
Breaks services through tires, because if you take the consumers tires off their vehicle gives you the chance to inspect other wheels their breaks.
We do see some nice demand for conversion from tires into breaks as result of that.
As it relates to the downstream effect.
I think certainly more harsh winters the tendency to tariff things on the vehicles, However, I will say.
One benefit of having a more mild winter is usually that leads to spring coming sooner.
It opens up a window I think for an extended spring selling season. So.
What were we felt feel like we're well positioned diving coming out of the winter given our strength and how we performed historically in the service categories and given the the emphasis that we placed on good better best packages and store I think we feel confident the will will be well positioned going into the spring selling season.
Got it that's all I have thanks.
Thanks, Scott Scott.
Thank you at this time I would like to turn the floor back over to management for closing comments.
Thank you for joining us today and for your continued interest and supportive Monroe. We believe we are well positioned to execute our strategy and drive long term value for our shareholders. We look forward to updating you on our progress next quarter have a great day.
Ladies and gentlemen, thank you for your participation. This concludes today's event.
Connect your lines at this time and have a wonderful day.
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Yes.
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