Q2 2025 Monro Inc Earnings Call
Good morning ladies and gentlemen and welcome to Monro Inks, earnings conference call for the second quarter of fiscal 2025. At this time all participants are an only-only mode.
Later we will conduct a question and answer session and the instructions will follow at that time. If anyone should require assistance during the call, please press start 0 on your touch tone, name. It has 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: Senior Director of Investigation Act Mongrot, please go ahead.
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 the call we will be referencing a presentation that is available on the Investors section of our website at corporate.manrow.com forward slash investors.
Speaker Change: If I could draw your attention to the State Parbo Statement on slide 2, I'd like to remind participants that our presentation includes some forward looking statements about Monroe's future performance.
Speaker Change: Actual results may differ materially from those suggested by our comment today.
Speaker Change: The most significant factors that could affect future results are outlined in Monroe's violence with the SEC and in our earnings release.
Speaker Change: The company disclaims any intention or obligation to update or revise any forward-looking statements.
Speaker Change: Weather as a result of new information, future events, or otherwise, except as required by law. Additionally, on today's call, management statements included discussion of certain non-gab financial measures which are intended to supplement and not be substitutes.
Speaker Change: for Comparable Gatmeasures. Reconciliation of such supplemental information to the Comparable Gatmeasures will be included as part of today's presentation and in our earnings release. With that, I let it turn the call over to Monroe's President and Chief Executive Officer, Michael Broderick.
Michael Broderick: and Good Morning everyone. This morning I'd like to share an update with you on our second quarter accomplishments. After that I'll outline several objectives that we plan to achieve in the third quarter.
Michael Broderick: Before I begin, I'd like to recognize and thank all of our teammates for their commitment to Monroe and our customers.
Michael Broderick: Tornado to slide three, starting with our accomplishments in the second quarter.
Michael Broderick: We drove a sequential improvement in our year over your comp store sales percentage change from the first quarter as well as the significant acceleration in our comp trends as the second quarter progressed.
Michael Broderick: This gives us further confidence that our initiatives are taking hold.
Michael Broderick: We like the progress but we are just getting started. Importantly, our tire dollar and unit sales improves sequentially from the first quarter and our tire category, thanks to the quarter, with year over year growth in units in the month of September.
Michael Broderick: We continue to leverage the strength of our manufacturer funded promotions, which allowed us to meet the needs of our value oriented consumer.
Michael Broderick: and although we continue to have more work to do to improve the performance of our higher margin service categories, and a show known as slide four, our Comfort Drive Digital Curtissing Inspection Process.
Michael Broderick: and our oil change offer allowed us to drive sequential improvement from the first quarter in our service category sales as well as year over your growth in both battery units and sales dollars in the quarter.
Michael Broderick: Additionally, we improved our attachment rate for alignments which resulted in year over your growth in both alignment units and sales dollars in the month of September.
Michael Broderick: Consistent with General Industry Trade-Down Dynamics, our gross margin in the second quarter was impacted by a value oriented consumer that traded down more of their tire purchases to our tier 3 offerings.
Michael Broderick: and while this tire makes pressured material margins in the quarter, we continue to drive labor optimization and efficiencies through productivity improvements, including scheduling, training and our attachment selling initiatives.
Michael Broderick: Now on to our objectives for the third quarter. Incurably, our sales momentum from the second quarter has continued into fiscal October without preliminary comp store sales down only 1%. Supported by improving trends, entires and all service categories including breaks.
Michael Broderick: Excluding the impact of hurricane, halene and melden, our preliminary comp store sells what it has been approximately flat compared to the prior year.
Michael Broderick: We expect to leverage this momentum to achieve our third quarter objectives which include
Michael Broderick: and proving historic traffic trends driven by a keen focus on oil change services as well as continued growth in tire units.
Michael Broderick: Accelerating the performance of our key service categories, utilizing the benefits from copyright and optimizing labor and efficiencies through continued improvements in productivity and maintaining prudent cost control.
Michael Broderick: In summary, our initiatives are driving an improvement in our top line results. Our Comps store sales trends improves sequentially from the first quarter and accelerated as the second quarter progressed. This was led by our tire category, which exited the quarter with Euro-Virier Unicrowth in September.
Michael Broderick: While we have more work to do to improve the performance of our higher margin service categories, we drove us to Quenchill Improvement in Service Category Sales from the first quarter. You're over your growth in batteries in the quarter and you're over your growth in alignment in the month of September.
Michael Broderick: This serves as evidence that our initiatives are working.
Michael Broderick: and although our gross margin took a step back in the quarter, we are confident that we remain on a path to restore our gross margin's back to pre-COVID levels with double digit operating margins over the longer term as we return to top line growth.
Michael Broderick: Our sales momentum in October, as well as continued traction from our initiatives, we'll enable us to achieve our third quarter objectives.
Speaker Change: And with that, I'll now turn it over to Brian who will provide an overview of Monroe's second quarter performance, strong financial position and additional color regarding fiscal 2025. Brian.
Brian: Thank you, Mike, and good morning, everyone. Turning to slide five, our year-over-year, comparable store sales percentage change improved 410 basis points sequentially from the first quarter of fiscal 2025, resulting in sales of $31.4 million.
Brian: Sales decrease 6.4% year over year, which was primarily driven by a 5.8% decline in comparable store sales.
Speaker Change: is Mike just walked through, we drove a significant acceleration in our Comstor sales trends as the quarter progressed. For reference, Comst were down 8% in July, followed by an improvement to down 6% in August. And we exert the quarter down 3% in September.
Speaker Change: While year-over-year tire units were flat in the second quarter, we aggregated the quarter with low single-digit growth in units during the month of September. We also gained tire market share in our higher margin tiers in the quarter.
Speaker Change: Comp store sales in our 300 small or underperforming stores were consistent with our overall comp in the quarter.
Speaker Change: Turning to slide 6, gross margin decreased 40 basis points compared to the prior year, primarily resulting from higher material costs due to mix within tires and higher fixed occupancy costs as a percentage of sales, partially offset by lower technician labor costs as a percentage of sales.
Speaker Change: Total operating expenses were $93.2 million, or 30.9% of sales, as compared to $92.6 million, or 28.8% of sales in the prior year period.
Speaker Change: The increase as a percentage of sales was principally due to lower year-over-year comparable store sales and an increase in advertising spend.
Speaker Change: Operating income for the second quarter declined to $13.2 million, or 4.4% of sales. This is compared to $22.4 million, or 6.9% of sales in the prior year period.
Speaker Change: Net interest expense increased to $5.1 million as compared to $4.8 million in the same period last year. This was principally due to an increase in our weighted average interest rate.
Speaker Change: Income tax expense was $2.5 million, or an effective tax rate of 30.9%, which is compared to $4.7 million, or an effective tax rate of 26.8% in the prior year period.
Speaker Change: The year-over-year difference in effective tax rate is primarily due to state taxes and discrete tax impacts related to share-based awards.
Speaker Change: Net income was $5.6 million, as compared to $12.9 million in the same period last year. Diluted earnings per share was 18 cents. This is compared to 40 cents for the same period last year.
Speaker Change: Driving the $0.24 difference in adjusted diluted earnings per share was the 5.8% decrease in year-over-year comparable store sales. As a reminder, every 1% change in quarterly comp store sales represents about $0.04 of adjusted diluted earnings per share.
Speaker Change: Please refer to our reconciliation of adjusted diluted EPS in this morning's earnings press release and on slide 10 in the appendix to our earnings presentation for further details regarding excluded items in the second quarter of both fiscal years.
Speaker Change: As highlighted on slide 7, we continue to maintain a strong financial position. We generated $88 million of cash from operations, including $38 million of working capital reductions during the first half of fiscal 2025.
Speaker Change: Our AP to inventory ratio improved further at the end of the second quarter to 185% versus 164% at the end of fiscal 2024.
Speaker Change: We received nine million dollars in divestiture proceeds as well as nine million dollars from the sale of our corporate headquarters
Speaker Change: We invested $14 million in capital expenditures, spent $20 million in principal payments for financing leases, and distributed $17 million in dividends.
Speaker Change: At the end of the second quarter, we had net bank debt of $41 million, and a net bank debt to EBITDA ratio of 0.3 times, and total liquidity of $529 million.
Speaker Change: As we have commented earlier and on recent earnings calls, we have made significant progress in several foundational areas, including gross margin expansion in the first half of fiscal 2025, inventory optimization by leveraging strong vendor partnerships, and our solid financial position.
Speaker Change: These foundational improvements coupled with our market-facing initiatives
Speaker Change: including our Comfort Drive Digital Courtesy Inspection process, our oil change offer, and focus on our 300 small or underperforming stores, as well as our relentless focus on improving the customer experience, are setting us up for improved financial performance.
Speaker Change: Now, turning to our expectations for the full year of fiscal 2025 on slide 8.
Speaker Change: For full year fiscal 2025, we continue to expect gross margin expansion versus 2024. We also believe our fixed occupancy costs within cost of goods and operating expenses will be approximately flat on a dollar basis when compared to the prior year.
Speaker Change: 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.
Speaker Change: We expect to generate at least $120 million of operating cash flow, inclusive of continued working capital reductions, in fiscal 2025.
Speaker Change: The strength of our financial position, including our cash flow, positions us to fund all of our capital allocation priorities, including our dividend, during fiscal 2025. Regarding our capital expenditures, we expect to spend $25 million to $35 million in fiscal 2025.
Speaker Change: And with that, I will now turn the call back over to Mike for some closing remarks.
Mike: Thanks, Brian. Our business has long-term durability in an industry that remains fundamentally strong.
Mike: Our initiatives are driving improvement in our top-line results.
Mike: This along with our foundational progress to expand margins in the first half of fiscal 2025 as well as our cash flow generation Will enable Monroe to reap benefits as tire volumes continue to recover
Mike: We are poised to win with our scale, strategic relationships, and our experienced management team. With that, I will now turn it over to the operator for questions.
Speaker Change: Thank you. If you would like to ask a question then please press star fluid by one on your telephone keypad. To withdraw your question please press star fluid by two.
Speaker Change: Please also ensure that your phone is unmuted locally. We kindly ask that you limit yourself to one question and one or two follow-up questions.
Speaker Change: Our first question comes from Thomas Wendler from Stevens Inc. Thomas, please go ahead.
Thomas Wendler: Hey, good morning everyone.
Speaker Change: Good morning, Thomas, good morning.
Thomas Wendler: Hey, I just wanted to touch on the American tire distributors bankruptcy filing I think your contract with them requires you to purchase 90% of your tires And then you still have a 6.8 million earn out from them. Can you just kind of give us a Idea of the impacts there that you're expecting
Michael Broderick: Sure Thomas, Mike, there is no impact at right now, business as usual and they're a big key to supporting us growing our tire category. So we have nothing to report anything differently than what's been filed. We're just acting as a great customer.
Thomas Wendler: Okay, yeah, thank you for that. And then kind of shifting gears, I think you mentioned a mix shift at tier three tires during the quarter. Can you give us an idea of where the tire mix shook out between the different tiers?
Speaker Change: Yeah, sure.
Speaker Change: The
Speaker Change: Tier 1 and Tier 2 differently shifted down to Tier 3. We grew approximately 30%.
Speaker Change: The industry also grew and it really shifted into Tier 3.
Speaker Change: and 30 percent. That's probably the biggest outlier when you look at the category.
Speaker Change: Nothing's really changed in the tire business. It's still, the customers are trading down. I would say without question, everything that we see, we're gaining market share in tier one through three, using our vendors to support us with their promotions.
Speaker Change: and our teams are delivering against them. And the industry is still selling a lot of inexpensive tires at Tier 4. We are also participating in Tier 4. We're just doing it in a more balanced approach. I think it's good for units, where we're showing that we're improving our units.
Speaker Change: It's good for protecting the ASP and I think it's a better value for the customer all at the same time.
Speaker Change: That was great. I appreciate you guys answering my questions. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from David Larkes from Wells Fargo. David, please go ahead.
David Larkes: Hey, good morning guys and thanks for taking my questions. Can you talk about the buckets within gross margin in a bit more detail? And then any color you can provide around how to think about the second half would be helpful as well.
Speaker Change: Tire margins were negatively affected by the trade down we just discussed from Tier 1 and 2 down to Tier 3.
Speaker Change: A secondary contributor to tire margins was just the way manufacturer rebates are landing. We had lower manufacturer rebates recognized in the quarter, primarily related to lower tire purchases over the last few quarters.
Speaker Change: And then also contributing to overall material margin pressure was the higher mix of tires relative to our service categories, especially brakes.
Speaker Change: Contributing also to the decrease year-over-year was 60 BEPs related to deleverage on occupancy costs on the lower sales. So occupancy costs were relatively flat versus the prior year, but on the lower sales value they delevered.
Speaker Change: Offsetting that, partially offsetting that, was 130 BIPs of technician payroll productivity, which we continue to see and deliver versus the prior year.
Speaker Change: is it relates to the back half of the year. Without getting into specific kind of call for the back half, I can't explain the forces that are at work. So when we think about material costs.
Speaker Change: We think the tire trade down persists.
Speaker Change: consumers going to continue to look for value so that dynamic doesn't change in the back half but we do expect related to the tire purchasing rebates that that will abate in the back half as our tire purchases over the last couple quarters have been much more supportive to higher rebates in the back half.
Speaker Change: And then also, as we're making significant improvement in our service categories, and they're starting to close the gap in terms of performance year-over-year to tires, that will also be an abating headwind in terms of our overall mix between tire and service.
Speaker Change: We expect occupancy costs to improve as a percent of sales as we continue to deliver better top line, and we'll gain leverage on those fixed costs.
Speaker Change: And then as it relates to technician pay, as we've said for a while now, we continue to deliver good productivity, but we are starting to lap the good performance of the prior year. So we think technician productivity gains year over year will still be there. They'll just be diminishing in terms of the size relative to the prior year.
Speaker Change: Got it. That's helpful. And then just for the overall business, could you talk about traffic and ticket trends in the quarter?
Speaker Change: David, Mike, the...
Speaker Change: When you look at everything improved in the quarter month over month over month, that's one thing and going into October That's one thing and it's across the board. We do we declare that we're going to get our tire business back We got the tire business back
Speaker Change: We're going to get our oil business back. We're going to get our brakes business back. And we're seeing it in the results. When you look at the customers and what happened, we were down approximately high single digits, 9% in customer decline. And we did have some ASP to offset that.
Speaker Change: Got it. That's helpful. And then last question for me, you paid down about $50 million in debt this quarter. So curious if you have any color on how to think through interest expense going forward.
Speaker Change: Sure, a lot of our interest expense is related to our financing leases.
Speaker Change: So that, you know, roughly $290 million of finance lease debt generates a good portion of that. But we are seeing reductions as we're bringing the debt down. We would expect in the back half of the year for interest expense to be fairly consistent with where it was in the prior year.
Speaker Change: Great. Thank you.
David Larkes: Thanks, David.
Speaker Change: Thank you. The next question comes from Brett Jordan from Jeffreys. Brett, please go ahead.
Brett Jordan: Hey, good morning guys.
Brett Jordan: Morning, Brett. On the ASP tailwinds, I guess, could you sort of give us some color? I mean, it sounds like the Tier 3 tire shift would not be a tailwind to ASP, but obviously real strength in batteries, and maybe what do you attribute that to, and where did you see other price offset to the negative traffic count?
Brett Jordan: Yeah, I would say that it definitely, the shift from tier 1 and 2 down to 3 and 4 puts pressure on ASP.
Speaker Change: We are and we feel like that is that's a good guy coming moving forward into the quarter I mean we really reversed
Speaker Change: the significant traffic decline and tire decline in our organization.
Speaker Change: and we're going to be doing that across the board. I would say from a tire perspective, we're going to continue, even though the marketplace is not that healthy, still not that healthy, I would say a lot of what we're doing at Monroe is going to help us continue the tire trend.
Speaker Change: The second big part of the equation when you look at the service categories, I really like our batteries and how they're performing. I know I like the alignment business. The big call out really is all about where's brakes and I would say that's the biggest opportunity.
Speaker Change: It's a big ticket item, so it's going to be something that we're really focused on.
Speaker Change: Okay, and I guess in October, how is the traffic versus price in that minus one cup?
Speaker Change: Yeah, we're continuing to see the comp led by PriceMix but with improving traffic trends.
Speaker Change: Oh, got a card.
Speaker Change: All right, great. Thank you.
Brett Jordan: Thanks, Brett.
Speaker Change: The next question comes from Brian Nagel from Oppenheimer. Brian, please go ahead.
Brian Nagel: Thank you guys, good morning.
Speaker Change: Good morning, Brian.
Brian Nagel: The question I have, and I just want to understand better.
Brian Nagel: kind of just to sort of say the dynamic in the quarter between gross margin and top line. Because if you look, I know you addressed this a bit already, but the gross margin, the trajectory shifted dramatically.
Brian Nagel: to the negative than what we've seen in the prior quarter. So I guess the question I have initially is, as we think about this,
Brian Nagel: improving, strengthening, solidifying.
Brian Nagel: top line trend? Is to some extent that coming at the expense of gross margin? And then as a follow-up to that, as we look, think about the business going forward, I mean, do you see a path towards
Brian Nagel: Simultaneous improvement in comps and gross margins, or would there be this ongoing trade-off?
Speaker Change: I can address that, Brian. I think the first thing we have to recognize is the environment that we're operating in and that trade-down dynamics impact on our material margins.
Speaker Change: As well as, you know, the level of both manufacturer-funded and self-funded promotions that we're using to continue to attract and get guests into our stores to buy tires.
Speaker Change: That macro backdrop is putting overall pressure in this period of time on the overall material margins. Our path back to those high 37-38% pre-COVID gross margins
Speaker Change: really relies on that dynamic improving.
Speaker Change: So, there's not a trade-off between top line and our material margins, but there is a promotional trade-down dynamic at work that's affecting it during this particular period of time.
Speaker Change: Also, at the same time, we're improving our service categories, so that's another lever where we see...
Speaker Change: improved path towards.
Speaker Change: higher gross margins.
Speaker Change: But in this particular quarter, with brakes down 12 and with tires only down four, that was a headwind to this quarter with another item that we expect.
Speaker Change: in order to achieve those 38% gross margins, we need to continue to improve like the progress we made in the quarter and continue to make into October.
Speaker Change: And then ultimately occupancy costs, you know, to turn positive in terms of comps would take that 60 bps of occupancy costs.
Speaker Change: of headwind and obviously turn it into a tailwind. So that's the way we think about the bridge up there, but it certainly, I don't want to downplay the margin pressure created by the mix effect in the trade down that the value-oriented consumer is acting upon.
Speaker Change: Felix Broderick, Felix Veksler
Felix Veksler: That's helpful, Brian. Give me just a follow-up to that then.
Felix Veksler: Again, sorry for, you know,
Felix Veksler: and the labor in this. But if you look at this, this was fiscal Q2. If you go back to fiscal Q1.
Felix Veksler: You know, so I think if I recall correctly, there was also an improving sales trajectory in that period. But the gross margins were, you're on your much stronger. So what changed, what was the primary change then from in that dynamic from Q1 to Q2?
Speaker Change: The primary change I would say would be the material margins and the tier 1 and 2 to tier 3. So up until that point...
Speaker Change: We really hadn't seen that much pressure on Tier 1 and Tier 2. We were really protecting a lot of our trade down to Tier 4 by having some really good Tier 3 offerings and trying to preserve that Tier 3 versus Tier 4 mix.
Speaker Change: which we did in the quarter. We grew tier 1 through 3 relative to the industry. But at the same time in the quarter we saw tier 1 and 2 trade down into tier 3. That was the primary difference between
Speaker Change: Q1 and Q2 and at the same time we're starting to lap also the benefits of some of that technician pay improvement so that while that was a 240 basis point tailwind for us in Q1 that that subsided to 130 in Q2 which was expected.
Speaker Change: That's very helpful. I appreciate it. Thank you.
Speaker Change: Bye.
Speaker Change: Thank you.
Speaker Change: We have no further questions, so I'll now hand it back over to Michael Broderick for closing remarks.
Michael 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 our stakeholders. I look forward to keeping you updated on our progress. Have a great day.
Michael Broderick: Thank you.
Speaker Change: Felix Broderick, Felix Veksler