Q4 2022 Monro Inc Earnings Call
Player in this industry.
We have developed a strategy to improve our underperforming stores, which represent about a quarter of our overall store base. The majority of our stores are growing sales and producing solid margins we have.
Evidenced that our strategy is working.
After 20% comparable store sales growth in the first nine months the fourth quarter was severely impacted by COVID-19 surge. This impact was felt across our industry. The sales shortfall amounts to approximately $15 million versus our internal plan or 15% to 20 of earnings per share.
Nonetheless, our staffing strategy is working in the fourth quarter. We added 200 technicians, which are in addition to the 450 technicians added since the first quarter of fiscal 'twenty two.
This has resulted in US now having 650 more technicians than it started this initiative a 15% increase.
Of course, this carrier to cost our technician labor costs increased 250 basis points, but also resulted in the substantial improvement in sales.
Fiscal 2022 comparable store sales and our medium and larger stores increased about 5% compared to fiscal 2020.
During this same time period comparable store sales and our 300 or so small in underperforming stores declined by about 8%.
Understaffing was the principal reason, let me make this point very clear. These stores received a healthy number of inquiries and they've been able to convert these inquiries at the company average they're sales would have been quite different.
Just did not have the necessary staff to provide the proper level of service that customers require we started implementing our new staffing initiatives in over 150 of the smaller stores.
And the three fiscal months ended April 2022, their comp sales increased 8%, a 16 percentage point swing in their performance our staffing strategies to meet latent demand is working.
We hope to have all 300 underperforming stores properly staffed by the end of calendar year 2022 subject to the tight labor market.
We expect even better results as the year progresses and all of this has been done while maintaining our material margins as we move forward in fiscal 2023 sales trends are encouraging while april's comparable store sales were 3% lower than our record April last year may is trending 3% higher on a larger sales base.
To summarize in fiscal 2022, we made large investments in recruiting training and deploying new technicians, particularly to our medium and larger stores. These technicians are now starting to produce results as measured by higher service and tire sales and higher at mature margins.
We are now working to improve the sales and productivity of our 300 small and underperforming stores. The demand is there and we believe we are now meeting it as the early numbers show.
Now turning to the divestiture, we announced today.
This morning, we announced an agreement to divest our wholesale entire distribution assets to American tire distributors, a major player in that business.
It has become very clear after an exhaustive review of our wholesale locations that we were too small to be an effective competitor. In addition, we found that we could get much better service from a large national distributor then we could provide by doing it ourselves.
Our core strength as a business is to provide retail customers with superior automotive products and services.
We will focus all our energies and resources on our retail operations.
Our relationship with American tire distributors will give us a much better availability of tires, much quicker delivery and better price the transaction valued at about $105 million is expected to close in June .
The proceeds from this transaction along with the excess cash that our retail operations are expected to generate will allow us to continue expanding our long standing policy of sharing our results with our shareholders. The board of directors has approved a <unk> <unk> per share increase in the cash dividend for the first quarter of fiscal 2023 to 28.
Per share we have increased our cash dividend 17 times during the 17 year since the cash dividend was first issued.
In the past five years, we have increased our quarterly cash dividend from <unk> 18 per share to <unk> 28 per share. In addition, the board has authorized a share repurchase program for the repurchase of up to $150 million of the company's common stock.
Acquisitions are a major part of our strategy. We believe we have ample capacity for large medium or small sized businesses, which fit into our overall strategic plan. We investigate thoroughly decided on how to integrate the new company into our team and concurrently learn as much as possible about our new teammates this care.
<unk> approach results in a successful transaction as shown by our recent California acquisitions, which are producing results ahead of our expectations.
Above all we strive to maintain price discipline, particularly in this era of high multiples this pays off.
In summary, there is robust demand for our products and services in fiscal 'twenty. Two we made significant investments in technician head count productivity to expand sales and earnings while this put pressure on our gross margin. It has positioned us to drive sustainable comparable store sales growth in fiscal 2023.
We believe we are well on our way to resolving the understaffing that has impacted our smallest stores along with continued contribution from our medium and larger stores, we expect to deliver comparable store sales and earnings per share growth as well as significant cash flow generation.
The divestiture of our noncore wholesale a tire distribution assets will allow for a sharper focus on our retail operations.
This will allow us to return capital to our shareholders through healthy dividend and share repurchase programs as well as capitalize on acquisitions with that ill now turn the call over to Brian who will provide an overview of <unk> fourth quarter performance strong financial position and additional color regarding fiscal 2023, Brian .
Thank you, Mike and good morning, everyone.
Turning to slide nine.
<unk> increased seven 4% year over year to $328 million in the fourth quarter same.
Same store sales increased one 4% while sales from new stores increased $19 million.
Gross margin decreased 320 basis points from the prior year to 31, 9%.
The year over year decrease was primarily due to an incremental investment in technician head count and wages to support current and future top line growth. We estimate that this incremental investment impacted gross margin by 250 basis points in the quarter.
Lower than expected comparable store sales growth also resulted in higher fixed distribution and occupancy cost as a percentage of sales.
Material costs as a percentage of sales were flat as the inflationary impact of higher material costs were offset by higher selling prices and a mix shift towards our higher margin service categories total operating expenses were $93 2 million.
Or 28, 4% of sales as compared to $86 4 million or 28, 3% of sales in the prior year period the.
The increase was principally due to having 41, new stores as well as due diligence and integration costs related to acquisitions completed and evaluated in fiscal 2022.
Operating income for the fourth quarter declined to $11 5 million.
Our three 5% of sales, primarily driven by lower year over year gross margin.
This is compared to $27 million.
Or six 8% of sales in the prior year period.
Net interest expense decreased to $5 7 million as compared to $6 7 million in the same period last year. This was principally due to a decrease in weighted average debt.
Income tax benefit with a net benefit of $2 4 million, which included a $3 $1 million tax benefit due to differences in statutory tax rates from last years in which net operating losses have been carried at this.
This compares to $2 $3 million of tax expense in the prior year period.
Net income was $8 6 million as compared to $11 $8 million in the same period last year.
Diluted earnings per share was <unk> 25.
Compared to 35 for the same period last year.
Adjusted diluted earnings per share a non-GAAP measure was <unk> 20 in the quarter and excluded approximately <unk> <unk> per share of costs related to store impairment charges and acquisition due diligence and integration costs.
Nine of income tax benefit related to net operating loss carryback.
This compares to adjusted diluted earnings per share of 38 for the same period last year, which excluded <unk> <unk> per share of costs related to our monro forward initiatives management transition cost and a distribution center closures.
As highlighted on slide 10, we continue to maintain a very solid financial position, we generated $174 million of cash from operations during fiscal 2022.
We invested $28 million in capital expenditures paid $83 million for acquisitions and spent $39 million in principal payments for financing leases.
Lastly, we distributed $35 million in dividends.
At the end of the fourth quarter, we had bank debt of $176 million cash and cash equivalents of $8 million and a net bank debt to EBITDA ratio of <unk> nine times.
While we're not providing guidance for fiscal 2023, we are providing color to assist in your modeling.
Note that our fiscal 2023 comments exclude the P&L impact from the divestiture of the wholesale and tire distribution assets. While we are still working to finalize the onetime gain or loss on the divestiture, we expect the ongoing impact to be accretive to overall growth and operating margin and neutral to.
Earnings per share.
As we make investments in store labor to drive higher year over year sales. This will continue to put pressure on our gross margins in fiscal 2023, which should be offset by a higher percentage of service sales.
Pricing actions and lower distribution and occupancy costs as a percentage of sales as we leverage higher sales against largely fixed costs.
Total operating expenses are expected to be slightly lower as a percentage of sales on a year over year basis and regarding our capital expenditures, we expect to spend approximately 40 million to $50 million in fiscal 2023.
And with that I will now turn the call back over to Mike for some closing remarks. Thanks, Brian we're encouraged by the momentum in our business and optimistic about our outlook for fiscal 2023 and beyond overall, we believe we remain well positioned to capitalize on strong demand, while having the financial flexibility to execute our growth.
<unk> and deliver long term value creation for our shareholders with that I'll now turn it over to the operator for questions.
Thank you if you would like to ask a question. We invite you to press star followed by one on your telephone keypad. If you change your mines are no longer wish to ask your question you can press star followed by Keith.
Please ensure that you are on me to Nike when you guys ask your question.
Briefly to allow for questions being registered.
Our first question today comes from Jonathan Lamers of BMO capital markets.
Allison Apta.
Good morning.
Good morning.
Great.
Yes, Im not sure how much color you want to give care, but for those 300 underperforming stores.
Could you tell us how far are the gross margins are below average maybe.
And maybe how much the margins improved.
Is the comp sales swung from negative 8% to positive 8%.
Yes.
Jonathan that is a big initiative on behalf of Monroe I've talked about it in the past.
Every retailer knows the bottom 300 stores.
I would say most of my prepared remarks were centered around the fact that we are we really do have sales under control when we memory demand and supply and the demand as our customers and suppliers.
Our teammates I can tell you from a gross profit perspective, there is not.
They are very much very similar to most of our stores.
So it's really all about marrying capacity and productivity.
And we just need to get the sales volume up to a level, where they're able to drive to the bottom line those sales can fall to the bottom line.
Okay, and how much further does the technician head count needs to increase by year.
Year end fiscal 2022, and do you have any update on the progress in Q.
Fiscal Q1.
Yes.
So we continue to really optimize and really to kind of.
Work on reasserting, our labor across all of our stores.
And I think that's a big opportunity for us to continue going forward, but we are in the later innings of how many additional head count I mean, we've made a significant investment in 'twenty two to really put us in 'twenty three and the situation, where we can take care of the demand in the marketplace, but right now it's really focused on those small stores as well as opportunistically filling in.
<unk> two <unk>.
Other stores, where we have a significant amount of the benefit just keeping up with the demand.
Okay. One detail question before I turn it over what were the trailing sales for the tire distribution assets that were sold and Brian did you say that that sale will be accretive to gross margins.
Yes, Jonathan I'll take the second part first.
They will be accretive to gross and operating margins and neutral on an earnings per share basis and.
<unk> assets that are about $115 million in sales for trailing 12.
Okay. Thanks, I'll pass the line.
Thank you.
Thank you Jonathan next question today comes from Bret Jordan of Jefferies Bret.
ACTH.
Hey, good morning, guys.
Hey, Brett.
Divestiture of the distribution business is there I guess from a physical infrastructure standpoint like Monro.
<unk> D C was sort of I think sort of almost attached.
So on the corporate infrastructure are you.
Would you have to do much physical carve out here or do they sort of operated within your <unk>.
Within your infrastructure and I guess, the second follow up on that is that is all parts sourcing going to be external now since your ability to do direct import parts and put them on the tire truck might be challenged.
Yeah, Let me, let me address it so more details to come exactly how the Dcs are laying out.
But where we're going as an organization that very much is relying on a third party partners.
<unk> talked about in the past that im relying on with third party partners on the parts and now on the tire side HDD Tam.
To manage availability quality and price.
When I look at this business I've been in for 30 years, but it's all about relationships and it's all about using partners to make us a better organization, we're going to be focused on our retail customer.
Commercial customer and also focusing on entertainment, that's our focus now specifically around parts.
We're going to be extremely loyal to our parts to providers going forward, we're not going to just source the tal.
50, movers, and we expect our retail or our preferred partners to source the slow moving items for us we're going to look across the board and we're going to rely on them to be able to provide us the products I believe that's going to give us a better price in the marketplace, we're going to be more significant to our third party partners.
Going forward. The same thing goes for tires, we're going to improve our service to our stores, we're going to get everyday service, which we're not getting right now.
From from our distribution centers remember most of those warehouses were centered in North Carolina.
Kentucky, So they didn't reach all of our stores.
So now we're going to have everyday delivery from HDD, which is best in class and.
I am really looking forward to bringing new assortment to our stores. So that we can be more relevant on both the tires and then continue to evolve our parts distribution.
Using a third party providers.
Okay, Great and then a question on the tire pricing model.
Thank you said tires were down one on the comp could you talk about what was units versus price and in the Q4 comp on tires and maybe I guess.
You have at the units as a comparable to pre Covid like Q4 of I guess fiscal <unk> fiscal <unk>, just sort of feel where we are in volumes versus pre pandemic environment.
Yeah, Brian I'll take that I would say that like all kind of parts of our business in the quarter we.
Ticket.
Does the leading factor.
And the and the comp performance and I would say relative to the unit performance that what we saw was that we were in line with industry trends for our retail business throughout the quarter. So our ability to continue to hold units, while driving ticket and certainly can.
<unk> to see variable gross profit per tire increase as well in the quarter.
The tire category has been really strong for us and it happened again in Q4.
Okay, Great and then my last housekeeping the monthly comps I think you've given us.
January and April , but our tenure.
It is one or two of the months could you give us the monthly for the quarter.
Yes. It was up about one in January up five in February and down about two in March.
Okay, great. Thank you.
Yeah.
Thank you Brett next question comes from Brian Nature of Oppenheimer.
Ryan. Please go ahead.
William Dawson on for Brian Nagel. Thank you for taking my question.
Good morning.
Our first question margins.
With regard to gross margin.
There's some expectation for more improvement.
Mix in services recovered.
Can you say at what point in the quarter.
The decision was made to lean into the incremental investments in <unk>.
And how we should think about the magnitude of the impact to gross margins in Q4.
Three quarters of fiscal 2020 period in March.
Alright.
This is Mike good morning, just to be clear on gross profit.
<unk>.
<unk> gross profit for us material margin.
Dino distribution and occupancy.
And then last but not least is technician payroll.
When you look at material margins were flat to last year, and we have that under control, we manage that through price and mix.
So when we talked about moving to service categories that was a big deliverable for our organization even in the fourth quarter I'll give you a great example, we actually lowered our break pricing and drove more units and that actually helped us deliver a better mix in the business.
Number two when I look at D&O, we had pressures in our distribution costs in the fourth quarter without the without a doubt.
Looking forward, though that's going to become.
Much less of an issue as we rely on <unk> for our tires and we rely on our preferred suppliers on the parts side.
And then number three the technician payroll we started this in 'twenty two.
We clearly recognize there was demand for our services and almost every one of our stores.
Our best stores are performing extremely well.
Our bottom 300 stores traditionally have been understaffed.
I have not been able to meet demand.
So we've done through 'twenty two in a very deliberate in the way is literally continuing to invest in our technician payroll.
Now just to be clear the investment a technician payroll there's two different components of investment. There is one is the wage inflation and number two is the actual head count all breakout that 250 basis points to be more clear, we invested 150 basis points in the fourth quarter, an incremental technicians.
100 basis points and wage inflation just to be clear.
To be clear I do believe that we're going to continue to leverage.
As we go into more productive seasons.
The first and second quarter, we have not talked about exactly how it breaks out and theres going to be a lot of moving pieces and we look forward to giving you more clarity after the first quarter and separating out the wholesale business.
Thank you that's very helpful.
And our next question.
With regard to top line.
Consistent with April comps were down 3%.
Year over year versus a record last year.
And here in May.
Quarter to date, it's running up 3%.
<unk>.
Just weather related.
There are other factors in plywood to consumer.
As you saw from the recent improvement.
And also recognizing that you're not giving guidance for the balance of fiscal 'twenty three.
And how should we think that puts and takes with regards to sales.
Next couple of weeks or months.
Yes.
Can I just go back to January just to be very clear January although we were positive it was significantly below our internal expectations and we were pretty consistent across the at least the prior two quarters of having mid teen type of growth that we were getting used to so things really changed coming out of January even the first couple of weeks in February .
Remember week or two in February we had soft sales then immediately change.
Our customers and our teammates gone healthier. So we really saw a lot of improvement coming out of Covid. Then when you look at the March performance.
We were it's all productivity. So when we were adding capacity and managing capacity now. The next step is how do we drive productivity with the new teammates that we have so.
So that we really can get outsized performance and Thats, what we saw even in April and we're carrying forward into may that is the equation going forward as we have increased capacity with more technicians and now how do we get there.
Productivity up.
This really becomes a healthy business very quickly.
Thank you.
Thank you. Thank you. Our next question is a follow up question from Jonathan Lamers of BMO capital markets, Jonathan back to you.
When I look at the stack versus calendar 2019 levels.
We're not really seeing improvement in the April and May sort of.
Zero percent.
Zero percent in fiscal Q4 so.
Yes My question is.
Like how much do you need to see the comp improved to start.
Returning the gross margin percentage to toward historical levels, given given the given where staffing levels are now.
We generally are looking at mid single digits.
Jonathan if that helps with identifying worthy opportunity and where we're focused.
Yes that does help so.
I mean, the tire manufacturers have announced some pretty significant price increases recently.
Do you have any comments on your.
Pass through of that in recent weeks and months and whether you expect to maintain your variable gross margin per tire.
Yes.
That is a big focus we definitely understand theres a lot of cost increases coming into the marketplace and recognizing the team they've done a great job managing costs and passing it along I have said in the past and we continue saying, we're rational competitor, where we can pass along cost we are definitely doing that.
We're managing our markdowns were managing our really our promotional activity to be able to keep in line with margins and it seems like we are holding at least we're seeing very consistent with industry trends.
And thats more of what we're going to be doing going forward and last but not least is we're going to.
<unk> to give our customers choice, maybe they trade down into a lower cost higher based on the economic well being at that point in time, but we're still going to make good margins on those tires, it's about getting those customers into our door. We are looking for a balanced approach to the business both ticket, which we've demonstrated that we can drive ticket.
Most retailers right now and now our focus is driving additional repair orders additional customers into our stores.
So just a last question just on the outlook for getting to mid single digit comps.
Hi.
As the business almost there given the turnaround in the underperforming stores.
How long should we think about.
And it's playing out before before you get to that level.
Yes, I think we are we are seeing the business on a consolidated basis build to that level and I can say also that.
That comp that we're saying in May a plus III is being led by our retail locations. So we are definitely encouraged by the momentum that we're seeing and we talked about it in the prepared remarks that we expect continued improvement as the year progresses.
Okay. Thanks for your comments.
Thank you.
Thank you Jonathan.
Our next question comes from Daniel <unk> of.
Stephens Inc. Daniel.
The Ta.
Yes, thanks for taking my questions guys and good morning.
Brian I guess not to belabor a point, but I wanted to follow up on <unk> question on the gross margin a few months ago in late January I think you noted you're expecting gross margin leverage.
Obviously, we came in a few hundred basis points below that and if I think about it you knew about the head count investment.
Nick just mentioned that we knew January comps per week. So asked another way I guess, what was the biggest surprise in the quarter versus your expectation in late January and then given how fast that change how do you feel about your visibility into full year gross margin in kind of the outlook you've provided just given the volatility. We just saw in the last couple of months.
Yeah. That's a great question I appreciate it I think that as you as you look at where we were at the end of January we did have some expectations of recovering some of the sales loss that we saw coming through January so.
Not having or not having captured that as we move through the quarter. We did see strengthening in February but as Mike said it a few weeks into February until we saw that rebound in our business.
<unk> continued to put a little bit of pressure on the top line, which as you know puts pressure on our distribution and occupancy costs as a percentage of sales. So we lost more leverage there than maybe the cause.
Comments at the third call third quarter call reflected in addition.
I think that we continue to make great progress in our labor investment and I would say that.
We are well positioned and probably maybe a little bit ahead of schedule in terms of those hires the incremental 200, we were able to make in the Q in Q4, even in this kind of challenging labor environment environment, and certainly challenging <unk> environment in Q4.
And then also I would just highlight that it Mike said the team has done a great job of offsetting material cost.
Increases with our sales mix shift to service, but also passing through price.
I think that.
Maybe we get a little bit of leverage in material costs factored into that outlook at the end of the quarter last quarter, where we came in more more flattish as it.
Inflation Bill 10 during Q4.
Got it and so I guess the second part of that question. When you look at the full year outlook you provided on the commentary around gross margin you feel comfortable give.
Given all of the potential volatility in sales, but we can still achieve achieve the kind of outlook you discussed earlier Brian .
I'm just trying to handicap, maybe how volatile the model could be as we move through the year.
Yes, I mean, I think Mike really highlighted the key to our ability to do that and what we're seeing.
With the labor investments, we have made which is continued increased productivity in our labor as we continue to drive productivity for the technician technicians, we've added and continue to meet the demand that's in the marketplace with higher more higher productive technicians.
That will ultimately benefit our gross margins.
And our ability to take what was a headwind in labor in Q4.
Margins and as we progress through the year turn that into more neutral even a tailwind as we move into the later parts of this year, but just like sales that will improve as the year progresses there'll be more pressure earlier in the year and it will improve as our productivity and sales continue to climb as the year progresses as we.
Those are our expectations.
Got it and then last one for me and maybe just a clarifying point, Mike I mean, you mentioned, obviously labor is a point of deleverage, but I think Brian you. Just mentioned you hired a ton of people because I'm trying to square those two comments, where we left sales on the table because it didn't have enough technicians.
One to comps, but then we over hired relative to expected demand and that was a headwind to gross margin I guess, how can you square away. Those two statements that seem to be contradictory ones that we have too much labor demand. Once it is we don't have enough labor just trying to clear up any confusion there on those two comments.
Well, let me be crystal clear about in January that was a very difficult month for our service organization, just like all retailers, but I had one third of our stores that were affected by Covid, we haven't seen that type of in two years.
When I look at our investments in labor we needed everybody.
We really we were moving people around our stores and we were paying overtime. There was a lot of moving pieces and I keep going back to recognize the team or did that in the third quarter and we're going to continue doing that today recognize the team for how well they manage that.
When you look at the financials. It definitely does put pressure on the P&L, but we actually invested through the fourth quarter. So that we can have a really a jumping point off for the first quarter of 'twenty three.
And as Brian said, and I would say that we're seeing it.
Led by retail.
So I haven't really read it up without <unk>.
Pressure in the fourth quarter, but.
That leverages coming through in the first quarter of 'twenty three.
Got it I appreciate the color guys and best of luck.
Thank you. Thank you.
Thank you Danielle is that was our final question I would like to hand back to Michael Partridge for any closing remarks.
Well. Thank you for joining US today. This continues to be an exciting time to be part of <unk>. We have a strong foundation to build upon to create long term value for all of our stakeholders I look forward to keeping you updated on our progress have a great day.
Thank you. This concludes that crude today, we thank you for joining I appreciate great rest of your day. Thank you.
Okay.
Okay.