Q3 2023 Monro Inc Earnings Call
While these initiatives are aligned with delivering an outstanding guest experience. They had been strategically designed to boost customer traffic at our locations enable us to drive additional sales of our higher margin service categories and fulfill our commitment to maintain a balanced approach between tire and service categories to deliver enhanced profitability.
<unk> other stores grow.
Grow market share and position us as an even stronger competitor in every market we serve.
While these initiatives are still in the early days, we will be sure to provide updates on our progress in the quarters to come.
Now turning to our third quarter results and how inflationary pressures are impacting the consumer and our business.
Driven by strength in tires, we delivered mid single digit comp store sales growth in the third quarter of approximately 6%.
We continue to execute on our strategy to improve our 300 small underperforming stores, which represent about a quarter of our overall store base. These.
These stores delivered comp store sales growth of approximately 12% in the third quarter, which is on top of the double digit comp growth in the first half of this fiscal year or.
Our sales results for the group of stores through the first three quarters shows that our strategy is working.
As a reminder, our comp store sales at these stores decreased 8% in fiscal 2022 compared to fiscal 2020. The continued acceleration in sales at these locations is a direct result of our strategy to improve technician staffing levels as well as our training initiatives that are allowing us to better meet customer demand.
Comp store sales in our remaining stores were up approximately 5%.
Similar to last quarter broad based inflationary pressures under consumer continued to affect customer purchasing behavior in the third quarter.
We saw customers trading down to lower priced tier options.
We actively repositioned our tire assortment to give our customers the right tire at the right price.
We are staying relevant on opening price points to provide customers with more choice and greater value.
In preparation for the winter selling season, we raised in stock levels in our stores with an expanded snow tire offering a more established regional inventory for opening price point and altering tires and an upgraded inventory system to allow a daily review and replenishment.
We drove additional customer traffic to our store through manufacturer rebates on six tire brands and a free lifetime tire installation package.
Encouragingly, our tire units were positive in the third quarter with tire comp store sales up high single digits.
Based on third party syndicated U S replacement tire data all of this contributed to our outperformance entire units versus the industry in the third quarter.
We also saw stretched consumers continue making decisions to deferred vehicle maintenance, which put pressure on sales in some of our key service categories.
As a result, we chose to not fully pass through inflationary cost increases to an already stretched consumer.
The voice of our customer has indicated that raising prices at a time when they are struggling to accept them will likely result in the immediate loss of a sale and it has the potential to jeopardize a longer term relationship.
And as a reminder, developing this longer term relationship with our customers is a key element of our strategy.
While a higher sales mix of tires versus service customer trade down to opening price point tires are investment in price and our continued labor cost pressures impacted our gross margin prudent cost control in the third quarter allowed us to leverage operating expenses on a mid single digit comp.
As we continue to drive our business towards consistently delivering mid single digit comp store sales growth. We also remain committed to a more balanced approach between the tire and service categories.
That will deliver enhanced profitability of our stores the series of initiatives that I outlined at the outset of our call. This morning will allow us to achieve these expectations.
Our business is well positioned with the right strategy in place to take advantage of longer term industry tailwind, while the current macro environment remains challenging we continue to gain market share in the entire category with a keen focus on driving traffic to our stores and serving the culture needs of our customers.
The largely non discretionary nature of our business gives us confidence that as long as our stores are properly stocked our pricing is competitive with the right assortment and we continue to improve our in store execution will be able to capture market share gains in both our tire and service categories and encouragingly sale.
This momentum has continued into fiscal January with our preliminary comp store sales up approximately 8%.
Lastly, an update on our cash creation and capital allocation.
The strength of our financial position and cash flow as a competitive advantage, which enables us to make investments in price and labor to grow market share and capture new customers for the Walter.
As a reminder, an important focus of our strategy is cash creation.
We are continuing to unlock cash by optimizing inventory and leveraging the strength of our vendor partners for better availability quality and cost of tires and parts in our stores.
And then in the third quarter, we continued to generate strong operating cash flow led by reductions in our working capital.
Excess cash being generated by our operations and the strength of our balance sheet allowed us to continue returning capital to our shareholders in parallel to pursuing our growth strategy.
During the third quarter, we continued our long standing policy of sharing our results with our shareholders through our dividend and we continue deploying cash on our share repurchase program, which authorizes us to repurchase up to $150 million of the company's common stock.
After a careful review, which included our disciplined approach in evaluating multiples, we executed a definitive asset purchase agreement to acquire four additional stores in Iowa, and one additional store in Illinois.
This acquisition is expected to close in the fourth quarter and is expected to add annualized sales of approximately $6 million.
As part of our growth strategy, we continue to have significant capacity to acquire businesses, which fit into our overall strategic plan.
In summary.
We have implemented a series of customer focused initiatives that will benefit our business. We delivered mid single digit comp store sales growth in the third quarter.
Strategy to improve our smaller underperforming stores through our staffing and training initiatives is working we will continue to drive our business towards consistently delivering mid single digit comp growth with a commitment to a more balanced approach between tire and service categories that will allow us to leverage our cost structure to deliver enhanced.
Profitability.
Although we continue to navigate an uncertain macro environment, we have the right strategy in place to take advantage of longer term industry tailwind we.
We are focused on gaining market share and driving traffic to our stores through competitive pricing and the right assortment to meet the needs of our customers.
Our in store execution is firmly in our control and remains our greatest opportunity for improving our results.
As our training and productivity initiatives continued to take hold we expect to deliver improvements in sales and earnings significant cash flow generation through operational improvements and working capital reductions will allow us to continue returning capital to shareholders through healthy dividend and share repurchase programs as well as capitalize on acquisitions with.
That I will now turn the call over to Brian who will provide an overview of <unk> third quarter performance strong financial position and additional color regarding the remainder of fiscal 2023, Brian .
Thank you, Mike and good morning, everyone.
Turning to slide eight sales decreased one 9% year over year to $335 $2 million in the third quarter, which was due to the divestiture of our wholesale tire and distribution assets in the first quarter of fiscal 2023.
Sales for these divested assets were approximately $28 million in the prior year third quarter.
Comparable store sales increased five 6% and sales from new stores increased $6 million.
When adjusted for one additional selling day in the current year quarter due to a shift in the timing of the Christmas holiday from the third quarter and fiscal 2022 to the fourth quarter and fiscal 2023 comparable store sales increased four 4%.
Gross margin decreased 150 basis points from the prior year to 33, 8%.
Higher mix of tire sales in our retail locations.
Customer trade down to opening price point tires, as well as parts inflation that we intentionally did not fully pass through to the consumer increased material costs as a percentage of sales from the prior year.
In addition, incremental investments and technician labor and wages to support current and future top line growth increased labor cost 80 basis points from the prior year. These.
These increases more than offset the benefits to gross margin from the divestiture of our wholesale tire and distribution assets.
Total operating expenses were $89 6 million or 26, 7% of sales as compared to $93 1 million or 27, 3% of sales in the prior year period.
The decrease as a percentage of sales was principally due to prudent cost control, which allowed us to leverage operating expenses on mid single digit comparable store sales growth.
Operating income for the third quarter declined to $23 8 million or seven 1% of sales. This is compared to $27 4 million or 8% of sales in the prior year period.
Net interest expense increased to $5 9 million.
As compared to $5 $7 million in the same period last year. This was principally due to higher year over year interest rates.
Income tax expense was $5 million.
Or an effective tax rate of 27, 6% compared to $5 5 million.
Our effective tax rate of 25, 3% in the prior year period.
The increase in effective tax rate was due to a higher discrete tax impact related to share based awards as well as other state income tax impacts from the divestiture of our wholesale and tire distribution assets.
Net income was $13 million as compared to $16 3 million in the same period last year Duluth.
Diluted earnings per share was <unk> 41, compared.
Compared to <unk> 48 for the same period last year.
Adjusted diluted earnings per share a non-GAAP measure was <unk> 43.
This compared to adjusted diluted earnings per share of <unk> 49 in the third quarter of fiscal 2022.
Please refer to our reconciliation of adjusted diluted EPS in this morning's earnings press release and on slide eight in our earnings presentation for further details regarding excluded costs in the third quarter of both fiscal years.
As highlighted on slide nine we continue to maintain a very solid financial position, we generated a record $171 million of cash from operations. During the first nine months of fiscal 2023, including $71 million and working capital reductions.
This has reduced our cash conversion cycle by approximately 35 days at the end of the third quarter compared to the prior year period.
Our AP to inventory ratio at the end of the fiscal third quarter was 162% versus 79% at the end of fiscal 2022.
We received $66 million in divestiture proceeds of which $5 million are currently being held in escrow.
We invested $29 million in capital expenditures spent $30 million in principal payments for financing leases and distributed $27 million in dividends.
Lastly, cumulative repurchases of our common stock or approximately $97 million under our board authorized share repurchase program. We have used our significant cash flow to reduce invested capital by $180 million. During the first nine months of fiscal 2023.
At the end of the third quarter, we had bank debt of $130 million cash and cash equivalents of $13 million and a net bank debt to EBITDA ratio of <unk> seven times.
While we are not providing guidance for the remainder of fiscal 2023, we are providing color to assist in your modeling.
Note that our comments for the remainder of fiscal 2023 continue to factor in the divestiture, which generated about $115 million in sales in fiscal 2022.
As we continue to focus on gaining market share and driving traffic, we expect to continue maintaining appropriate staffing levels as well as competitive pricing to attract customers to our stores. This will likely continue to put pressure on gross margin in the fourth quarter of fiscal 2023.
In order to mitigate that we will be focused on driving sales in our higher margin service categories managing mix within our product categories to improve profitability.
And taking opportunistic pricing actions.
Total operating expenses in the fourth quarter are expected to be consistent as a percentage of sales on a year over year basis.
Our tax rate should be approximately 25% for fiscal 2023.
Regarding our capital expenditures, we expect to spend approximately $35 million to $45 million in fiscal 2023.
We also expect to continue improving our operating cash flow driven by continued working capital reductions our balanced approach of returning capital to shareholders as well as completing value enhancing acquisitions will meaningfully increase our return on invested capital and with that I'll now turn the call back over to Mike for some closing remarks.
Thanks, Brian we are optimistic about our outlook for the remainder of fiscal 2023 and beyond.
Although we still have important work to do we remain well positioned to execute our growth strategy and deliver long term value creation for our shareholders with that I'll now turn it over to the operator for questions.
As a reminder, if you'd like to ask a question you can press star one on your kind of thing keypad, if you will.
Your question you May press Star two.
Please limit yourselves to one question and one follow up question. Thank you.
Our first question for state comes from Brian Nagel Oppenheimer. Brian . Your line is now open. Please go ahead.
Hi, good morning.
Good morning, Brian and Brian Thanks.
Thanks for all the color.
A couple of questions.
First off just with respect to the deal.
Underperformance stores and now we've seen some.
For a trend and improving performance.
Potential is left in those stores.
Outsized comp growth we've seen.
Brian Good morning, it's Mike I would say that it's.
As part of our strategy is just to remind everybody that was year over year over year declines that we are now starting to reverse so I would look at the strategies. The exact opposite we're actually walking these stores back year over year over year, So my expectation and I know Mike.
<unk> field team understands the expectation that we're expecting double digit comps.
To really start reversing.
And we expect this type of growth for our I would say the next one to two years going forward.
Got it that's helpful. And then my second question I guess my follow up question Merrill merger coupled together.
So as you look at the results today.
Youre, calling out this kind of shifting buying patterns as a result of to some extent consumers traded down amid economic pressures.
I have as you look at as you look at that as a better demand for.
These more opening price tires.
What gives you the confidence that this does in fact reflect market share gains as opposed to potentially existing customers now just reacting to reacting to it and expand it more expanded product offering in the parkman Ralph.
No.
First of all we look at syndicated data.
And we actually can see.
The breakdown based on tier one through tier four performance based on tires opening price point being tier for premium tires being tier one so I can actually see our performance by tier.
Now when I looked at our performance right now Brian . This is what we're focused on from the day, we have been on this call together.
Sales margin and cash accretion we are now finally seeing with are really with our partnership with <unk>.
<unk> seen real tire unit creation and it's not just.
Because where I think we have a better assortment for our customers and that started with really activating on opening price point, but our greatest opportunity that we have is obviously through.
Field execution and part of fueled executions job is to really take that opening price point opportunity and sell up through the screen based on the features benefits and advantages, but ultimately what drives us is market share. We can see the activities that we are deploying the stocking position the assortment of pricing decisions and it's coming to life.
In unit gain in.
In the markets that we serve and I think that is the success formula for for years to come.
Okay very helpful. I appreciate it thank you.
Thank you Brian .
Thank you. Our next question comes from Daniel <unk> Stephens, Inc.
Your line is now open.
Hey, guys. This is Joe <unk> on for Daniel Thanks for taking my question.
Of course, and good morning, gentlemen.
So it looks like the two year stack for monthly comps accelerated sequentially from December to January pretty meaningfully could.
Maybe provide some color on how you think the consumer is receiving the increased promotional activity right now and maybe how that trended through the quarter.
Joe I'll take that one I would say that just on the promotional activity.
Clearly, what we did as we execute it using our supplier partners promotional activity similar to really our competition in the marketplace. So we're very disciplined in our approach using our.
And our vendor support to be able to drive and attract customers through pricing incentives I would say going forward from December into January I'm actually pleased with although we had a very strong December in tires, driven by tires and you can see that in my margin, but in January actually flipped, where I had a very strong brake months.
So ultimately January is not a trend, but I actually like to see how we are meeting our customers' needs not just on tires, but also in our service categories and I believe most of that's just driven through all of the activities that were deploying at the local level, where really we're meeting the customers.
Not just with tires, but also service categories.
Just a really just go back to the fundamentals of this business. We have to have a balanced approach we have to have tires growing and our service categories growing breached leading that service category for us to really drive profitable sales.
That's super helpful. Thank you.
And then maybe as a follow up could you maybe provide some thoughts on.
Not this year, but maybe the long term SG&A growth rate or margin. If you are comping at your mid single digit comparable.
Yes. This is Brian .
I would say that as it relates to kind of our outlook, maybe just for Q4.
We expect some improvement in our gross margin level somewhere between where we ran in Q2 at 35 mid 30, fives and where we ran here in Q3, which is just south of 30 34. So we expect to trend somewhere in that range improvement off of Q3, though the gross I'm sorry, the SG&A.
We expect to be about flattish year over year.
We have a little bit lighter on the volume month, our volume quarter in Q4, historically based on seasonality. So we delever a little bit from where we traditionally run in Q3.
As it relates to the long term, we're not providing longer term guidance, but as we've been as we've said as we achieve our mid single digit comp growth, we expect to improve both margins as well as leverage our fixed costs in SG&A and we think that that gives us a good path to return our operating margins back to.
Where they've run historically certainly double digits.
Got it. Thanks, so much guys Thats all from me.
Thank you John Thank you.
Thank you.
Our next question comes from John Healy of Northcoast Research John Your line is now open.
Thank you.
Just wanted to dive in a little bit more about the supply side of things.
One of the things that surprised me a little bit as you guys talking about that manufacturers may be giving you some more support and rebate that thing. So would just love to kind of hear kind of what you have seen there maybe how thats changed and could that actually begin that buffer gross margin. Later this year and are you starting to see.
Or at least this calendar year.
Are you starting to see manufacturers.
Rollback any price increases or.
<unk>.
Go beyond just giving you maybe some support on the sales side in the field.
John I'll take care of that well I'll take that one it's Mike.
I think it's less about the manufacturers. It's all about Monro, we were as we really become a bigger customer with fewer suppliers that they are investing behind us.
And that's not only on the tire side, but the parts side. So what we deployed in the fourth quarter is really we took advantage of.
What they normally have in the marketplace for our competitors, but monro really stepped up activators against it really partnered with fewer suppliers and we just became more relevant.
And.
It really benefited us on top of that we actually lived into what we've committed to we deployed tires. We really gave our teams the assortment that they need to compete in the marketplace. We kept them in stock and these are the things that our suppliers are looking for from a large customer like monro.
So I really have to give credit to not only the field team, but the merchandising organization of our inventory teams really making ourselves getting us.
Ready.
For basically a winter season that came over 10 days.
Okay, and then I just wanted to ask just I feel like the commentary on the M&A pipeline, that's maybe a little bit different than I was expecting so would just love to hear what you guys are seeing there.
Others come to you.
At anything that maybe would be.
Bigger in size than what you've kind of normally like that or just kind of any color on how the M&A pipeline has that in cookeville up here because I thought maybe we were taken a little bit more of a conservative town narrow at least.
That's what I thought it might.
Yes, no I mean, there's really as we look at our at our M&A opportunity.
The activity that we've been working we have we have more than 10 NDA signed we continue to evaluate deals.
We've always been a very disciplined financial buyer and I think adding to that now we're a very disciplined operational buyer, meaning that we're going to take on stores that.
Have a really clear path to quick accretion for us with limited kind of investments in our teams time for needing to improve those stores immediately we have a lot of focus on our bottom 300 stores like we've talked about we need to continue that focus.
We have a real focus on improving our business delivering those mid single digit comps and improving our profitability and across all of our categories. So with that focus we want to be really.
Disciplined in our in our acquisition approach, we had a deal that we announced this quarter. It was one of those.
All of the criteria that allowed for a nice acquisition and a nice integration and we look forward to closing that in Q4, but there will be continued M&A as we move forward for the deals that makes sense for us operationally and financially.
Great. Thank you guys.
Thank you.
Okay.
As a reminder, if you'd like to ask a question you can press star one on your telephone keypad.
Our next question comes from Bret Jordan of Jefferies. Bret Your line is now open.
Hey, good morning, guys.
Good morning.
Adjust for I guess sort of a lot of the pricing moving pieces do you have that day adjusted car count comp, but we could look at just sort of to think about traffic versus the lower price point tires and sort of the other moving parts.
Yes, we don't provide.
We have provided kind of a traffic number even an unadjusted per day so.
The quarter was continued to be led by ticket.
And tire units, we said were positive those were positive both reported and adjusted.
Okay, and then I guess it sounds like.
January services picked up but did you see anything sort of structural and the demand for the service side of the business was it either.
We're feeling that that maybe the surge in the prior year or a pull forward or lack of weather or anything drove the negative service comp or is it just.
More focus on tires in the quarter, but service picked up in January .
I would say that it's a continuation of our strategy I mean, we've been talking a lot about service over the last years, so having a balanced approach.
I would like to not talk so much about January because it's only one month and there is a lot of the exchange. So when we talked about last quarter October had a strong service component. This will be a really important quarter for us as we continue to get this mix right.
December was very strong in tires, I would say that we could potentially be going against a soft January from last year I'm happy to see a double digit growth in brakes and that is the expectation going forward is continuing to get the balance right and I liked that double digit number, especially in the service categories.
Okay and then the housekeeping question, Brian could you give us the monthly <unk> and is there any regional dispersion of that talk about.
Yes from a regional standpoint.
All regions were up a little bit weaker in the west, but not too meaningful.
As it relates to the monthly is three 7% in October three and a half in November 10, and a half in December as reported and that gets you to the <unk> six.
December would have been six and a half if youre looking at the fourth floor.
Okay, great. Thank you.
Youre welcome Thanks, Brian .
Yes.
King we have no further questions. So I'll hand back to see Michael Partridge for any further remarks.
Alright, well. Thank you for joining US today. This continues to be an exciting time to be part of Monroe, we have a strong foundation to build upon to create long term value for all our stakeholders I look forward to keeping you updated on our progress have a great day.
Thank you for joining today's call you may now disconnect your lines.
Yeah.