Q4 2024 Monro Inc Earnings Call
Operator: Good morning, ladies and gentlemen, and welcome to Monro Inc.'s earnings conference call for the fourth quarter and full year fiscal 2024. At this time, all participants are in a listen-only mode. Later, we'll conduct a question and answer section, and instructions will follow at that time. If anyone should require assistance during the call, please press star zero on your touchtone phone. And as a reminder, this conference call is being recorded and may not be reproduced in whole or in part without permission from the company. I would now like to introduce Felix Veksler, Senior Director of Investor Relations at Monroe. Please go ahead.
Good morning, ladies and gentlemen.
Welcome to the Monro, Inc earnings conference call for the fourth quarter and full year fiscal 'twenty 'twenty four at this time all participants are in a listen only mode. Later, well conduct a question and answer section and instructions will follow at that time.
If anyone should require assistance during the call. Please press star zero on your Touchtone phone.
And as a reminder, this conference call is being recorded and may not be reproduced in whole or in part without permission from the company.
Speaker Change: I would now like to introduce Felix Tuxtla Senior director of Investor Relations. Please go ahead.
Felix Veksler: Thank you. Hello everyone.
Speaker Change: Thank you Hello, everyone and thank you for joining us on this morning's call before we get started please note that as part of this call. We will be referencing a presentation that is available on the investors section of our website at corporate Monro dotcom forward slash investors.
Felix Veksler: And thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we will be referencing a presentation that is available on the investor section of our website at corporate.monroe.com forward slash investor. If I could draw your attention to the Safe Harbor Statement on Slide 2, I'd like to remind participants that our presentation includes some forward-looking statements about Monroe's future performance, and actual results may differ materially from those suggested by our comments today.
Felix Veksler: The most significant factors that could affect future results are outlined in Monroe's filings with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise except as required by law. Additionally, on today's call, management statements include a discussion of certain non-GAAP financial measures, which are intended to supplement and not be substitutes for comparable GAAP measures.
Speaker Change: Draw your attention to the Safe Harbor statement on slide two I'd like to remind participants that our presentation includes some forward looking statements about months rose 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 minerals.
Speaker Change: Filings with the SEC and in our earnings release, the company disclaims any intention or obligation to update or revise any forward looking statements, whether as a result of new information future events or otherwise except as required by law. Additionally on today's call management's statements include a discussion of certain non-GAAP financial measure.
Speaker Change: 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 my role as President and Chief Executive Officer, Michael Broderick.
Felix Veksler: Reconciliations of such supplemental information to the Comparable Gap 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 Monroe's President and Chief Executive Officer, Michael Broderick. Thank you, Felix.
Michael T. Broderick: Thank you, Felix, and good morning, everyone. I'd like to spend the first part of our call this morning discussing the longer-term durability of our business within the broader auto aftermarket tire and services space. Then, I'll talk about current tire dynamics as well as the actions we've taken to navigate an industry-wide deferral and trade-down cycle that has lasted longer than most in our industry would have expected. After that, I'll introduce four initiatives we've recently implemented to offset weakness in the tire market.
Speaker Change: Thank you Felix and good morning, everyone.
Michael T. Broderick: I'd like to spend the first part of our call. This morning discussing the longer term durability of our business within the broader auto aftermarket tire and services space.
Michael T. Broderick: Then I will talk about current tier dynamics as well as the actions we've taken to navigate an industrywide deferral and trade down cycles that has lasted longer than most in our industry would have expected.
Michael T. Broderick: After that I'll introduce four initiatives, we recently implemented to offset weakness in the tire market.
Michael T. Broderick: I'll conclude my comments today with the foundational progress we've made that will enable Monroe to reap benefits when tire volumes recover. Starting with the longer-term durability of our business. First, we are positioned as one of the leading players in our highly fragmented industry, at approximately 1,300 stores in 32 states.
Michael T. Broderick: I'll conclude my comments today with the foundational progress we've made that will enable monro to reap benefits when tire volumes recover.
Michael T. Broderick: Starting with the longer term durability of our business first we are positioned as one of the leading players in our highly fragmented industry.
Michael T. Broderick: At approximately 3500 stores in 32 states, we have significant scale that gives us important competitive advantages over smaller players in our industry.
Michael T. Broderick: We have significant skill that gives us important competitive advantages over smaller players in our industry. We leverage this skill and the strength of our financial position to make critical investments in our business, our people, and technology to deliver an outstanding guest experience.
We leveraged the scale and the strength of our financial position to make critical investments in our business, our people and technology to deliver an outstanding guest experience.
Michael T. Broderick: These fundamentals include an overall growing trend of more than 280 million vehicles in operation, vehicle miles traveled that have recovered to pre-COVID levels, and an average vehicle age of more than 12 years that continues to increase. Further, on slide four, an increase in the complexity of vehicles continues to drive a shift from do-it-yourself to do-it-for-me, with future technological advances expected to accelerate the shift to do-it-for-me. Third, while the non-discretionary nature of our products and services may result in consumers deferring purchases or trading down, they cannot eliminate these purchases altogether.
Michael T. Broderick: Second the fundamentals of the industry remained strong as shown on slide three.
Michael T. Broderick: These fundamentals include an overall growing trend of more than 280 million vehicles in operation.
Michael T. Broderick: Vehicle miles traveled that have recovered to pre COVID-19 levels and an average vehicle age of more than 12 years that continues to increase.
Michael T. Broderick: Further on slide four and increasing the complexity of vehicles continues to drive a shift from do it yourself to do it for me with future technology advances expected to accelerate the shift to do it for me.
Michael T. Broderick: Third while the non discretionary nature of our products and services May result, in consumers' deferring purchases or trading down they cannot eliminate these purchases all together.
Michael T. Broderick: And finally, we have an experienced management team that is keenly focused on maximizing efficiencies, including costs, to protect margins during what we believe to be a temporary period of challenges to our top line. All of this gives us confidence that Monroe is well-positioned to withstand the current downturn and poised for long-term success.
Michael T. Broderick: And finally, we have an experienced management team that is keenly focused on maximizing efficiencies, including costs to protect margins during what we believe to be a temporary period of challenges to our topline.
Michael T. Broderick: All of this gives us confidence that monro is well positioned to withstand the current downturn and poised for long term success.
Michael T. Broderick: Now on to the current tire dynamics as well as the actions we've taken to navigate them. Turning to slide 5, tires are providing a temporary yet meaningful negative impact given that they represent around 50% of our overall business. Strained low to middle-income consumers are deferring tire purchases in higher-margin tiers and disproportionately trading down to tires at opening price points. This is being supported by an oversupply of lower-margin tires in the U.S. Additionally, milder weather has contributed to the general tire deferral cycle.
Michael T. Broderick: Now onto the current tier dynamics as well as the actions we've taken to navigate.
Turning to slide five tires are providing a temporary yet meaningful negative impact given that they represent around 50% of our overall business.
Michael T. Broderick: Strained low to middle income consumers are deferring tire purchases in higher margin tiers, and disproportionately trading down to tires at opening price points.
Michael T. Broderick: This is being supported by an oversupply of lower margin tires in the U S. A.
Michael T. Broderick: Additionally, milder weather has contributed to the general tire deferral cycle. The overall impact of this as fewer U S tire replacement units being sold at a lower overall average selling price.
Michael T. Broderick: The overall impact of this is fewer U.S. tire replacement units being sold at a lower overall average selling price. This has led to pressured store traffic for us, which is not supportive of the attachment of our higher margin service category.
Michael T. Broderick: This has led to pressured store traffic for us, which is not supportive to attachment of our higher margin service categories.
Michael T. Broderick: We are navigating the tire situation by leveraging the strength of our manufacturer-funded promotion, which has allowed us to optimize our assortment for improved tire profitability with a higher average selling price per tire. Additionally, based on retail sellout data from Torqueda, a subsidiary of ATD, our tire market shares remain broadly in line with the overall market in our higher margin tiers. We are also responding to continued consumer trade-down dynamics by accelerating our proportion of opening price point tires.
Michael T. Broderick: We are navigating the tire situation by leveraging the strength of our manufacturer funded promotions.
Michael T. Broderick: Has allowed us to optimize our assortment for improved higher profitability with a higher average selling price per tire encouragingly based on retail sell out data from tour Kita a subsidiary of HDD, our tire market shares remained broadly in line with the overall market and our higher margin tiers.
Michael T. Broderick: We're also responding to continued consumer trade down dynamics by accelerating our proportion of opening price point tires.
Michael T. Broderick: If the consumer continues to stay value-oriented and our tire manufacturers don't meet our expectations with a step up in their support quickly, we are prepared to continue to meet our customers where they are by further increasing our tire mix at opening prices. Next, we recently implemented four initiatives to offset weakness in the tire market. Turning to slide six.
Michael T. Broderick: At consumer continues to stay value oriented in our tire manufacturers don't meet our expectations with a step up in their support quickly. We are prepared to continue to meet our customers where they are by further increasing our tire mix at opening price points.
Michael T. Broderick: Next we recently implemented four initiatives to offset weakness in the tire market turning to slide six the first is an investment we've made in our stores to convert our 32 point courtesy inspection from a paper based process to a digital tablet based system that presents other needed services too.
Michael T. Broderick: The first is an investment we've made in our stores to convert our 32-point courtesy inspection from a paper-based process to a digital, tablet-based system that presents other needed services to our customers via industry data and pictures. This gives our store teams a greater ability to build engagement and trust with our guests, which supports additional service attachments. This also supports the marketing back of any declined work for future visitors. It also allows us to capture more structured data on the vehicles that we see and gives us more control over a key in-store process. We have now completed the rollout to all of our stores, and we are pleased with the early results. We'll be sure to update you on the progress of our digital courtesy inspections in the future.
Michael T. Broderick: Our customers via industry data and pictures.
Michael T. Broderick: This gives our store teams greater ability to build engagement and trust with our guests which supports additional service attachment. This also supports the marketing back of any decline work for future visits.
Michael T. Broderick: It also allows us to capture more structured data on the vehicles that we see and gives us more control over our key in store process.
Michael T. Broderick: We have now completed the rollout to all of our stores and we're pleased with early results. We will be sure to update you on the progress of our digital courtesy inspections in the future.
Michael T. Broderick: The second is a service coupon where we are offering customers a $50 rebate toward the purchase of additional services with the purchase of one set of brake pads or rotors. With new pads and rotors on both axles, customers can earn up to $200 in coupons that can be applied to any additional purchase of surfaces or tires. The goal of this promotion is to increase service attachment and add value for our customers.
Michael T. Broderick: The second is a service coupon, where we are offering customers a $50 rebate towards the purchase of additional services with the purchase of one set of brake pads or rotors with.
Michael T. Broderick: With new pads and rotors on both actuals customers can earn up to $200 and coupons that can be applied to any additional purchase of services or tires. The goal of this promotion is to increase service attachment and add value for our customers.
Michael T. Broderick: The third is a buy three tires, get one free promotion we've been running with the help of three of our tire suppliers, which allows us to sell better quality tires to a value-oriented consumer. The fourth is an oil change offer that was developed as part of our renewed partnership with Valvoline, where our customers can earn cash back on an oil change. Now, concluding with the foundational progress we've made that will enable Monro to benefit when tire volumes recover. Turning to slide 7.
Michael T. Broderick: The third is up by three tires get one free promotion, we have been running with the help of three of our tire suppliers, which allows us to sell better quality tires towards value oriented consumer.
Michael T. Broderick: The fourth is an oil change offer that was developed as part of our renewed partnership with Valvoline, where our customers can earn cashback on an oil change.
Michael T. Broderick: Now concluding with the foundational progress we've made that will enable monro to benefit when tire volumes recover.
Turning to slide seven despite a deferral and trade down cycle that has lasted longer than most would have expected. We have expanded our gross margins through tire mix optimization labor optimization through actions to reduce nonproductive labor costs, including overtime in our stores and labor efficiency through productivity.
Michael T. Broderick: Despite a deferral and trade-down cycle that has lasted longer than most would have expected, we have expanded our gross margins through tire mix optimization, labor optimization through actions to reduce nonproductive labor costs, including overtime in our stores, and labor efficiency through productivity improvements, including scheduling, training, and our attachment selling initiative. We will continue to remain relentlessly focused on improving our 300 small or underperforming stores, maintaining a balanced approach between tire and service categories with competitive pricing to drive store traffic and continuously improving our customer experience.
Michael T. Broderick: Including scheduling training and our attachment selling initiatives.
Michael T. Broderick: We will continue to remain relentlessly focused on improving our 300 smaller underperforming stores, maintaining a balanced approach between tire and service categories with competitive pricing to drive store traffic and continuously improving our customer experience.
Michael T. Broderick: In addition, our efforts to optimize inventories by leveraging strong vendor partnerships are resulting in better availability, quality, and cost of parts and tires in our stores. It has improved our cash conversion cycle through inventory management and extended payment terms. Our solid financial position, including operating cash flow generation and a strong balance sheet, supports capital return to shareholders through a healthy dividend program. We have positioned the business for a return to earnings growth when we're able to achieve flat tire units with appropriate attachments in service categories.
Michael T. Broderick: In addition, our efforts to optimize inventories by leveraging strong vendor partnerships is resulting in better availability quality and cost of parts and tires in our stores. It has improved our cash conversion cycle through inventory management and extended payment terms.
Our solid financial position, including operating cash flow generation and a strong balance sheet supports capital returned to shareholders through a healthy dividend program.
Michael T. Broderick: We are positioning the business for a return to earnings growth when were able to achieve flat tire units with appropriate attachments on service categories.
Michael T. Broderick: In closing, our business has long-term durability, and while tires are providing a temporary negative impact, we are navigating the situation well with our actions. We have implemented initiatives to offset weakness in the tire market, and we have made foundational progress that will enable Monro to benefit when tire volumes recover. Despite the challenges posed by the current macroeconomic environment, our business continues to be well positioned, and we are confident that we remain on a path to restore our gross margins back to pre-COVID levels with double-digit operating margins over the longer term.
Michael T. Broderick: In closing our business is long term durability and while tires are providing a temporary negative impact we are navigating the situation well with our actions we have implemented initiatives to offset weakness in the tire market and we have made foundational progress that will enable monro to benefit when tire volumes recover.
Michael T. Broderick: Despite the challenges posed by the current macroeconomic environment, our business continues to be well positioned and we are confident that we remain on a path to restore our gross margins back to pre COVID-19 levels with double digit operating margins over the longer term.
Michael T. Broderick: Before I turn the call over to Brian, I'd like to recognize and thank all of our teammates for their efforts in serving the needs of our customers. And with that, I'll now turn it over to Brian, who will provide an overview of Monro's fourth-quarter performance, strong financial position, and additional color regarding fiscal 2025.
Speaker Change: Before I turn the call over to Brian I'd like to recognize and thank all of our teammates for their efforts in serving the needs of our customers and with that I'll now turn it over to Brian who will provide an overview of <unk> fourth quarter performance strong financial position and additional color regarding fiscal 2025 Bryan.
Brian: Thank you, Mike, and good morning, everyone. Turning to slide 8, sales decreased 0.2% year over year to $310.1 million in the fourth quarter, including $24.4 million for the extra week in the current year period. Comparable store sales increased 0.1% on a reported basis and decreased 7.2% when adjusted for the extra week of sales in fiscal 2024. This was driven by the consumer and tire dynamics that Mike just walked through.
Mike: Thank you, Mike and good morning, everyone.
Brian: Turning to slide eight sales decreased 2% year over year to $310 $1 million in the fourth quarter, including $24 $4 million for the extra week in the current year period.
Bryan: Comparable store sales increased 1% on a reported basis and decreased seven 2% when adjusted for the extra week of sales in fiscal 2024.
Speaker Change: This was driven by the consumer entire dynamics that Mike just walked through.
Brian: Tire units in the quarter were down 11%. Comp store sales in our 300 small or underperforming stores were consistent with our overall comp in the quarter. Gross margin increased 210 basis points compared to the prior year, primarily resulting from lower technician labor costs, including a 15% reduction in overtime hours, and lower material costs as a percentage of sales, which were partially offset by higher fixed occupancy costs as a percentage of sales.
Bryan: Higher units in the quarter were down 11%.
Comp store sales in our 300 small our underperforming stores were consistent with our overall comp in the quarter.
Bryan: Gross margin increased 210 basis points compared to the prior year, primarily resulting from lower technician labor costs, including a 15% reduction in overtime hours and lower material costs as a percentage of sales, which were partially offset by higher fixed occupancy costs as a percentage of sales.
Brian: Total operating expenses were $99.7 million, or 32.2% of sales, as compared to $97.6 million, or 31.4% of sales, in the prior year period. The increase on a dollar basis was principally due to $1.6 million of higher non-recurring costs in the quarter compared to the prior year period. Excluding these costs, total operating expenses, inclusive of an extra week, increased $500,000 compared to the prior year.
Bryan: Total operating expenses were $99 7 million or.
Bryan: Our 32, 2% of sales as compared to $97 $6 million or 31, 4% of sales in the prior year period.
Bryan: The increase on a dollar basis was principally due to $1 6 million of higher nonrecurring costs in the quarter compared to the prior year period.
Bryan: Excluding these costs total operating expenses inclusive of an extra week increased $500000 compared to the prior year.
Brian: Operating income for the fourth quarter increased to $10.3 million, or 3.3% of sales. This is compared to $6.2 million, or 2% of sales, in the prior year period. Net interest expense decreased to $5 million as compared to $5.9 million in the same period last year. This was principally due to a decrease in weighted average debt.
Bryan: Operating income for the fourth quarter increased to $10 3 million or three 3% of sales this is compared to $6 $2 million or 2% of sales in the prior year period.
Bryan: Net interest expense decreased to $5 million as compared to $5 $9 million in the same period last year. This was principally due to a decrease in weighted average debt.
Brian: Income tax expense was $2 million, or an effective tax rate of 35%, which is compared to $200,000, or an effective tax rate of 35.2%, in the prior year period. Net income was $3.7 million, as compared to $400,000 in the same period last year. Diluted earnings per share were $0.12. This is compared to one cent for the same period last year. Adjusted diluted earnings per share, a non-gap measure, was $0.21. This is compared to adjusted diluted earnings per share of $0.08 in the fourth quarter of fiscal 2023.
Bryan: Income tax expense was $2 million or an effective tax rate of 35%, which is compared to $200000 or an effective tax rate of 35, 2% in the prior year period.
Bryan: Net income was $3 7 million as compared to $400000 in the same period last year diluted earnings per share was <unk> 12.
Bryan: This is compared to <unk> for the same period last year.
Adjusted diluted earnings per share a non-GAAP measure was 21.
Bryan: This is compared to adjusted diluted earnings per share of <unk> in the fourth quarter of fiscal 2023.
Brian: Please refer to our reconciliation of adjusted diluted EPS in this morning's earnings press release and on slide 13 in the appendix to our earnings presentation for further details regarding excluded items in the fourth quarter of both fiscal years. As highlighted on slide 9, we continue to maintain a very solid financial position. We generated $125 million of cash from operations during fiscal 2024. This has reduced our cash conversion cycle by 37 days at the end of the fourth quarter compared to the prior year period. Our AP to inventory ratio at the end of fiscal 2024 was 164% versus 178% at the end of fiscal 2023. Additionally, we received $21 million in divestiture proceeds.
Please refer to our reconciliation of adjusted diluted EPS in this morning's earnings press release and on Slide 13 in the appendix to our earnings presentation for further details regarding excluded items in the fourth quarter of both fiscal years.
Bryan: As highlighted on slide nine we continue to maintain a very solid financial position, we generated $125 million of cash from operations during fiscal 2024.
Bryan: This has reduced our cash conversion cycle by 37 days at the end of the fourth quarter compared to the prior year period, our AP to inventory ratio at the end of fiscal 2024 was 164% versus 178% at the end of fiscal 2023.
Bryan: We received $21 million in divestiture proceeds we invested $25 million in capital expenditures spent $39 million in principal payments for financing leases and distributed $36 million in dividends lastly repurchases of our common stock were $44 million under our share repurchase program, which authorized.
Brian: We invested $25 million in capital expenditures, spent $39 million in principal payments for financing leases, and distributed $36 million in dividends. Lastly, repurchases of our common stock were $44 million under our share repurchase program, which allows us to repurchase up to $150 million of the company's common stock. We have used our significant cash flow to reduce invested capital by $89 million during fiscal 2024. At the end of the fourth quarter, we had net bank debt of $95 million, a net bank debt to EBITDA ratio of 0.7 times, and total liquidity of $475 million.
Bryan: As us to repurchase up to $150 million of the company's common stock we have used our significant cash flow to reduce invested capital by $89 million during fiscal 2024.
Bryan: At the end of the fourth quarter, we had net bank debt of $95 million net bank debt to EBITDA ratio of <unk>, seven times and total liquidity of $475 million.
Brian: Now, turning to our expectations for the first quarter and the full year of fiscal 2025 on slide 10. As previously discussed in our commentary on the fourth quarter, we delivered an additional 13 cents of adjusted diluted earnings per share on flat top line sales in the fourth quarter, driven by variable margin expansion and prudent cost control. Although our preliminary comp store sales are down approximately 12% in the first quarter of fiscal 2025 so far, we expect to continue to deliver higher levels of profitability relative to sales in the quarter.
Bryan: Now turning to our expectations for the first quarter as well as the full year of fiscal 2025 on slide 10.
Bryan: As previously discussed in our commentary on the fourth quarter, we delivered an additional 13 of adjusted diluted earnings per share and flat top line sales in the fourth quarter, driven by variable margin expansion and prudent cost control.
Bryan: Although our preliminary comp store sales are down approximately 12% in the first quarter of fiscal 2025 to date, we expect to continue to deliver higher levels of profitability relative to sales in the quarter.
Brian: Current top line trends continue. We would expect approximately break even adjusted to diluted earnings per share for the first quarter of fiscal 2025. Note that every 1% change in Comstore sales from our first quarter to date run rate represents more than 3 cents in adjusted diluted earnings per share in the quarter. Our earnings in fiscal 2025 will largely depend on where comp store sales land for the full fiscal year. Note that every 1% change in comps from the prior year represents about a 14 cent increase or decrease in adjusted diluted earnings per share from the prior year.
Bryan: If current topline trends continue we would expect approximately breakeven adjusted diluted earnings per share for the first quarter of fiscal 2025.
Bryan: Note that every 1% change in comp store sales from our first quarter to date run rate represents more than three and adjusted diluted earnings per share in the quarter.
Our earnings in fiscal 2025 will largely depend on where comp store sales land for the full fiscal year.
Bryan: Note that every 1% change in comps from the prior year represents about a 14 <unk> increase or decrease in adjusted diluted earnings per share from the prior year.
Brian: This assumes our fixed occupancy costs within cost of goods and operating expenses will be flat on a dollar basis when compared to the prior year. Please note that Fiscal 2025 is a 52-week year, while Fiscal 2024 was a 53-week year that benefited from an extra week of sales in the fourth quarter. We expect to generate at least $100 million of operating cash flow, inclusive of continued working capital reductions, in fiscal 2025.
Bryan: This assumes our fixed occupancy costs within cost of goods and operating expenses will be flat on a dollar basis when compared to the prior year.
Bryan: Please note that fiscal 2025 is a 52 week year, while fiscal 2024. It was a 53 week year that benefited from an extra week of sales in the fourth quarter.
Bryan: We expect to generate at least $100 million of operating cash flow inclusive of continued working capital reductions in fiscal 2025, the strength of our financial position, including our cash flow positions us to maintain our dividend during what we believe to be a temporary period of challenges to our topline.
Brian: The strength of our financial position, including our cash flow, positions us to maintain our dividend during what we believe to be a temporary period of challenges to our top line. Regarding our capital expenditures, we expect to spend $25 to $35 million in fiscal 2025. And with that, I will now turn the call back over to Mike for some closing remarks.
Bryan: Regarding our capital expenditures, we expect to spend $25 million to $35 million in fiscal 2025.
And with that I will now turn the call back over to Mike for some closing remarks. Thanks.
Michael T. Broderick: Thanks, Brian. Our industry remains fundamentally strong. Our business has been disadvantaged by temporary challenges in the tire category. However, our actions to navigate the consumer deferral and trade-down dynamics, as well as our initiatives to offset weakness in the tire market and our progress to improve margins and improve cash flow, will enable Monroe to reap benefits when tire volumes recover. We are poised to win with our scale, strategic relationships, and our experienced management team. With that said, I'll now turn it over to the operator for questions.
Mike: Thanks, Brian our industry remains fundamentally strong our business has been disadvantaged by temporary challenges in the tire category.
Mike: Our actions to navigate the consumer deferral and trade down dynamics as well as our initiatives to offset weakness in the tire market and our progress to improve margins and improve cash flow will enable monro to reap benefits when tire volumes recover.
Mike: We are poised to win with our scale strategic relationships and our experienced management team.
Speaker Change: With that I'll now turn it over to the operator for questions.
Operator: Thank you, Mr. Broderick. Everyone, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by T. When preparing to ask you a question, please ensure your device is unmuted locally. In order to allow everyone in the queue an opportunity to ask the question, please limit your time to one question and one to two follow-ups. We'll pause here briefly as a question is being registered. We have the first question from David Lantz with Wells Fargo. Your line is open.
Thank you Mr. Patrick everyone. If you would like to ask a question. Please press star followed by one on your telephone keypad.
Speaker Change: If you change your mind, Please press star followed by <unk>.
Speaker Change: When preparing to asking a question. Please ensure your devices on mute locally.
Speaker Change: Jim.
Speaker Change: Allow everyone in the queue an opportunity to ask a question. Please limit your time to one question and one follow up.
Speaker Change: We will pause briefly ask a question at this time.
Speaker Change: We have the first question from David <unk> with Wells Fargo. Your line is open.
David Michael Lantz: Hey, good morning, guys. Thanks for taking our questions.
David Michael Lantz: Hey, good morning, guys. Thanks for taking our questions I guess first one from me tires have been under pressure for several quarters now. So curious if you can parse out the drivers of the weaker comps in March April and May to date in a bit more detail and have you seen a step change in deferrals are trading down relative to a few months ago.
David Michael Lantz: I guess the first one from me is that tires have been under pressure for several quarters now. So, curious if you can parse out the drivers of the weaker comps in March, April, and May to date in a bit more detail. And have you seen a step change in deferrals or trading down relative to a few months ago?
Mike: David Good morning. This is Mike I would say very clearly it is a tire story and it just accelerated or decelerated, depending how you want to look at it coming out of February when you look at the other categories.
Michael T. Broderick: David, good morning. This is Mike.
Speaker Change: The service categories, you had some improvement in batteries, but everything else.
Speaker Change: Very high attach category really followed along with the trends of of.
Speaker Change: Tires, when you look at brakes, especially.
Speaker Change: So when I look at the comp.
Speaker Change: <unk> I would say, it's really just nothing has changed we're very focused on our initiatives. It's not something that we've done we're priced right, we're sort at better than ever before and we're very focused on driving value at this point in time with where would the customers actually.
Michael T. Broderick: I would say very clearly that it is a tire story, and it just accelerated or decelerated, depending on how you want to look at it coming out of February when you look at the other categories. There was a [inaudible] It's not something that we've done. We're priced right, we're sorted better than ever before, and we're very focused on driving value at this point in time, where the customer is actually telling us what they're looking for.
Speaker Change: Telling us they're looking for what they're looking for.
Michael T. Broderick: Got it, that's helpful. And then you're accelerating your OPP tires. So, curious if you could help us think through the dynamics with regard to gross margins. And then do you have any visibility into when the oversupply of these tires could be totally worked through?
Speaker Change: Got it that's helpful and then Youre accelerating your otp tire. So curious if you can help us think through the dynamics with regards to gross margins and then do you have any visibility into when that the oversupply of these tires could be totally works through.
Michael T. Broderick: Unfortunately, I don't have a crystal ball on the oversupply of tires, but I'm very focused on making sure that if the customer is looking for value, that we're driving value. My emphasis still stays with Tiers 1 through 3, because that's the right assortment for our customers, and the right quality of tire. When I look at the OPP decisions that we've made, it was never an issue of not meeting the customers where they were expecting. We want to drive value at Monroe. That's been something that we've stood behind for many, many years, and we're using promotional dollars just to make sure they understand there's a choice.
Speaker Change: Unfortunately, I don't have a crystal ball and the oversupply of tires, but I am very focused on making sure that if the customer is looking for value that we're driving value.
Speaker Change: Still stays with tier one two or three because thats the right assortment for our customers right quality of tire when I look at the otp decisions that we've made it was never an issue of not meeting the customers where they wanted.
Speaker Change: Where they need where they were expecting we want to drive value at Monroe, that's been something that we've stood behind for many many years.
Speaker Change: And.
Speaker Change: We're using promotional dollars just to make sure. They understand there is a choice.
Michael T. Broderick: Fortunately or unfortunately, our tire mix really didn't change. Our tire units didn't change either. We didn't see anything in the industry data that told us that we lost market share, even with Tier 4. At this point in time, there's a lot of noise in the syndicated data. We're just very focused on getting more customers through the door. It wasn't that long ago, David, where we were actually positive in units and tires, and we were actually really demonstrating that we could grow mid-single digits, and that's what we're focused on.
Speaker Change: We are unfortunately, our tire mix really didn't change our entire units didn't change we didn't see anything in the industry data that told us that we lost market share.
Speaker Change: Even with tier four.
Speaker Change: At this point in time, there is a lot of noise in the syndicated data. We're just very focused on getting more customers through the door. It wasn't that long ago, David where we were actually positive in units and tires and we were actually really demonstrating that we can grow mid single digits and that's what we're focused on.
David Michael Lantz: Got it. That's helpful. And then just one quick one from the last one is, you noted break-even EPS for Q1 if top line trends continue. So curious if you can help parse out, you know, some SG&A and gross margin bucket expectations.
Speaker Change: Got it that's helpful. And then just one quick one from one last one as you noted breakeven EPS for Q1 of top line trends continue. So curious if you can help parse out some SG&A and gross margin expectations.
Brian: Yeah, absolutely, David. So we've done a really good job, as you can see in our Q4 of increasing variable margins and also prudent cost control. So when we look at the outlook for our first quarter, it certainly expects that variable margin expansion and prudent cost control to continue. What we have baked into the break-even is basically SG&A flattish fixed costs within cost of goods, consistent tax rate, and consistent interest. So really, what you're seeing come through in the break-even as well as the sensitivity we gave on comps is the flow through of the top line.
David: Yeah, absolutely David So we've done a really good job as you can see in our in our Q4 of increasing variable margins.
David: And also prudent cost control so when we look at the the outlook for our first quarter. It certainly can.
David: <unk> that variable margin expansion and prudent cost control to continue.
What we have baked into the breakeven is basically flattish.
David: SG&A flattish fixed costs within SG&A within cost of goods.
David: Consistent tax rate consistent interest, so really what youre seeing come through in the breakeven as well as the sensitivity. We gave on comps is the flow through of the top line.
Operator: Thank you. The next question is from Bret Jordan with Jeffreys. Your line is open.
Speaker Change: Thank you. The next question is from Bret Jordan with Jefferies. Your line is open.
Patrick Buckley: Hey, good morning guys. This is Patrick Buckley on for Bret. Thanks for taking our question. Good morning, Patrick. Taking a look at the new disclosure on franchise royalty revenue in last quarter's 10-Q, we saw a pretty significant increase. Was there anything notable to call out there, and I guess what should we expect for a normal run rate moving forward?
Speaker Change: Hey, Good morning, guys. This is Patrick Buckley on for Brent Thanks for taking our question.
Good morning. Thank you can look at the new disclosure on franchise royalty revenue and last quarter's 10-Q, we saw pretty significant increase was there anything notable to call out there and I guess, what should we expect for a normal run rate moving forward.
Brian: Yeah, that was really just related to the timing of the recognition of royalties related to one of our franchisees. We don't expect there to be any meaningful change in our historical run rate going forward.
Speaker Change: Yes that was really just related to timing of the recognition of <unk>.
Speaker Change: Royalties related to one of our franchisees, we don't expect there to be any meaningful change in our historical run rate going forward.
Patrick Buckley: Got it, that's helpful, thank you. And then, you know, as we look at the weather impact, was there any notable regional fallout?
Speaker Change: Got it that's helpful. Thank you and then as you look at the weather impact were there any notable regional callout there.
Michael T. Broderick: Patrick, good morning. This is Mike. If you're looking at where we had weakness, I would say it was in the South. I would say the Northeast and West actually performed better for us, and the Midwest was in line.
Mike: Patrick Good morning. This is Mike I would say our sales performance if youre looking at where we had weakness I would say it was led by the South I would say the northeast and West actually performed better for us in the Midwest was in line.
Patrick Buckley: Got it. That's all for us. Thanks, guys.
Mike: Got it that's all for US thanks, guys.
Speaker Change: Thank you. Thank you.
Operator: Thank you. The next question is from Brian Nagel with Oppenheimer. Your line is open.
Speaker Change: Thank you. The next question is from Brian Nagel with Oppenheimer.
Speaker Change: Your line is open.
William Dawson: Hey, good morning. This is William Dawson on behalf of Brian.
Speaker Change: Hey, good morning, William Dawson on for Brian. Thanks for taking my question.
William Dawson: Thanks for taking our question. Morning. So my first, our first question was on the initiative to offset tire market weakness. How do you assess the return on these initiatives? How should they impact the P&L? And how long should they be in place?
Speaker Change: Good morning, So my first.
Speaker Change: Our first question was.
Speaker Change: On the initiatives to offset tire market weakness.
Speaker Change: How do you assess the return on these initiatives how should the impact the P&L and how long should they be in place.
Michael T. Broderick: William, so we're very focused on growing top-line sales. That's our greatest opportunity to drive profitability and cash flow from a margin perspective. We're relying on our vendor partners to support us. And we're very focused, and obviously, on making sure that we drive productivity in our shops. And that's what you see. You've seen for the last three years at least. We've really created a P&L. That's variable eyes. We've done a lot of working capital, and I would say from a margin standpoint, we have a very healthy portfolio. We make money on everything that we sell. We have a lot of flexibility to be incredibly competitive, and we're going to continue to rely on our vendor partners to step up and help us drive sales. And that's where we're at right now. Although
Speaker Change: William So we're very focused on growing topline sales, that's our greatest opportunity to drive profitability cash flow from a margin perspective, we're relying on our vendor partners to support us.
Speaker Change: And we're very focused obviously on making sure that we drive productivity in our shops and Thats. What you see you have seen for the last three years, we've really created a P&L that's variable lies.
Speaker Change: We've done a lot of working from home a.
Speaker Change: A lot of work on working capital and I would say from a margin front, we have a very healthy portfolio, we make money on everything that we sell we have a lot of flexibility to be incredibly competitive and we're going to continue to rely on our vendor partners to step up and help us drive sales.
Michael T. Broderick: We don't see ourselves losing market share. We do see ourselves very focused on gaining market share and getting back to positive unit growth on tires, which leads to a strong service category improvement. I appreciate that. And to follow up a bit on a comment earlier about market share, you've provided some color on this with.
Speaker Change: And that's where we are right now, although we don't see ourselves losing market share. We do see ourselves very focused on gaining market share and getting back to positive unit growth on tires, which leads to a strong service category improvement.
Speaker Change: Yes.
Speaker Change: I appreciate that.
Speaker Change: To follow up a bit on <unk>.
Speaker Change: Comment earlier about market share.
Speaker Change: So you provided some color on this with.
William Dawson: I guess higher margins; you mentioned that your market share was in line. Could you just discuss, kind of across other tiers, too, would you expect us to change your term with these new initiatives? And I guess, in particular, over the course of this year, thinking about Monroe versus, like, any base case, industry trend assumptions that you would have. Thank you. Yeah, William. I'll take that. This is Mike.
Speaker Change: Hi, I guess higher margins you mentioned that your market share was in line.
Speaker Change: Can you just discuss kind of across other tiers. Two would you expect this to change near term with these new initiatives.
Speaker Change: <unk>.
Chris: Mike It's Chris.
Speaker Change: In particular over the course of this year thinking about Monroe versus like any base case industry trend assumptions that you have thank you.
Chris: Yeah.
Michael T. Broderick: Just to be very clear, we're not going to continue giving up market share, and we're very focused on growing units. For the last couple of years, we've done a lot of work getting our assortment right, obviously, with the divestiture of wholesale and the distribution centers. We have a lot of flexibility to be incredibly competitive in the marketplace. We're not worried as prices potentially come down or more promotional activity that's happening with our Tier 1 through 3 vendors.
Mike: Yes, William I'll take that this is Mike just to be very clear, we're not going to continue giving up market share and we're very focused on growing units.
Mike: For the last couple of years, we've done a lot of work getting our assortment right, obviously with the divestiture of wholesale in the distribution centers, we have a lot of flexibility to be incredibly competitive in the marketplace.
Mike: We're not worried as potentially prices come down or more.
Mike: <unk> activity, that's happening with our tier one through three vendors, we're very prepared taking advantage of those those dollars to support our margin and also the value proposition for our consumer so at this point in time when I look at the data and that's been always very important to me.
Michael T. Broderick: We're very prepared, taking advantage of those dollars to support our margin and also the value proposition for our consumer. So at this point in time, when I look at the data, and that's always very important to me, I never expected Tier 1 through 3 to be as negative as it is right now. I expect that to come back, and I expect our participation in Tier 4 to be very healthy, just like we demonstrated in the quarter, where we started out at a low 20 percent, then we moved to a mid-20 percent in February, and to a high 20 percent in March. And that's our attempt to stay very competitive, and at the same time, we're managing our productivity, which is flowing through to our margin.
Mike: I never expected tier one through three to be as negative as it is right now I expect that to come back and I expect our participation that tier four to be very healthy just like we demonstrated in the quarter, where we started out low 20%. Then we moved to a mid 20% in February to a high 20% in March.
Our attempt to stay very competitive and at the same time, we are managing our productivity, which is flowing through to our margins.
Mike: Okay.
William Dawson: I appreciate the color. Good luck!
Speaker Change: I appreciate the color good luck.
Speaker Change: Thank you.
Operator: Thank you. We currently have no further questions, so I'll hand it back to Mr. Broderick for closing remarks.
Speaker Change: Thank you.
Speaker Change: No further questions, so I'll hand back.
Speaker Change: He Mr <unk> for closing remarks.
Michael T. Broderick: 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 of our stakeholders. I look forward to keeping you updated on our progress. Have a great day.
Thank you for joining US today. This continues to be an exciting time to be part of Monro. We are 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.
Operator: Thank you, Mr. Broderick. This concludes today's call. Thank you for joining us. You may now disconnect your line.
Speaker Change: Thank you Mr. Roderick. This concludes today's call. Thank you for joining you may now disconnect your lines.
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