Q3 2025 Valvoline Inc Earnings Call
Becky: Hello and welcome, everyone, to the Valvoline's third quarter earnings conference call and webcast. My name is Becky, and I'll be your operator today. During the presentation, you can register a question by pressing * followed by 1 on your telephone keypad. If you change your mind, please press * followed by 2. I will now hand over to your host, Elizabeth Clevinger, with the investor relations team, to begin. Please go ahead.
Hello, and welcome everyone to the valvaline third quarter earnings conference call and webcast.
My name is Becky and I'll be your operator today.
During the presentation, you can register a question by pressing star, followed by 1 on your telephone keypad. If you change your mind, please press star followed by 2.
Elizabeth Clevinger: Thank you. Good morning and welcome to Valvoline's third quarter 2025 conference call and webcast. This morning, Valvoline released results for the third quarter ending June 30, 2025. This presentation should be viewed in conjunction with that earnings release, a copy of which is available on our investor relations website at investors.valvoline.com. Please note that these results are preliminary and so we file our form 10-Q with the Securities and Exchange Commission. On this morning's call is Lori Flees, our president and CEO, and Kevin Willis, our CFO. As shown on slide 2, any of our remarks today are not statements of historical facts or forward-looking statements. These forward-looking statements are based on current assumptions as of the date of this presentation and are subject to certain risks and uncertainties that may cause actual results to differ materially from such statements.
Oh no, Hyundai with your host, Elizabeth, Clevenger with investor relations team to begin. Please go ahead.
Thank you. Good morning and welcome to battling third quarter, fiscal 2025 conference call and webcast.
This morning valve released results for the third, quarter ended, June 30th 2025.
This presentation should be viewed in conjunction with that earnings release.
A copy of which is available on our investor relations website at investors valley.com.
Please note that these results are preliminary until we file our Form 10-Q with the Securities and Exchange Commission.
On this call is Lori, please. Our president and CEO and Kevin Willis our CFO.
As shown on slide 2. Any of our remarks today that are not statements of historical facts or forward-looking statements.
Elizabeth Clevinger: Valvoline assumes no obligation to update any forward-looking statements unless required by law. In this presentation and in our remarks, we will be discussing our results on an adjusted non-GAAP basis unless otherwise noted. Non-GAAP results are adjusted for key items, which are unusual, non-operational, or restructuring in nature. We believe this approach enhances the understanding of our ongoing business. A reconciliation of our GAAP to adjusted non-GAAP results and a discussion of management's use of non-GAAP and key business measures is included in the presentation attendance. The information provided is used by management and may not be comparable to similar measures used by other companies. With that, I will turn it over to Lori.
these 4 are looking statements are based on current assumptions as of the date of this presentation and are subject to certain risks, and uncertainties that may cause actual results to differ materially from such statements,
Following assumes no obligation to update any 4 looking statements unless required by law.
In this presentation and in our remarks, we will be discussing our results on an adjusted non-gaap basis. Unless otherwise noted
Results are adjusted for key items which are unusual non-operational or restructuring in nature.
We believe it's approach enhances the understanding of our ongoing business.
A Reconciliation of our Gap to adjusted non-gaap results and the discussion of Management's use of non-gaap and key business measures is included in the presentation of maintenance.
The information provided is used by management, and may not be comparable to similar measures used by other companies.
Lori Flees: Thanks, Elizabeth, and thank you for joining us today. I'd like to start with a quick look at our third quarter highlights on slide 3. We are pleased to have delivered strong sales, profit, and store growth for the third quarter. System-wide, sales increased 10% to $890 million and adjusted EBITDA increased 12% considering the impacts of refranchising. We delivered good same-store sales comps of 4.9%, including an 80 basis point impact for Easter, and we added 46 new stores in the quarter. As we continue to drive the full potential of the core business, we benefit from the resiliency of our customer demand. We continue to see no evidence of customers trading down or delaying services. In fact, the percentage of customers using our premium products grew both sequentially and year over year across the network. We're pleased to see continued transaction growth for our same-store base.
With that. I will turn it over to Lori.
Thanks Elizabeth and thank you for joining us today. I'd like to start with a quick look at our third quarter highlights of slide 3.
We are pleased to have delivered strong sales, profits and store growth for the third quarter.
Systemwide sales increased 10% to 890 million dollars and adjusted Eva increased 12%, considering the impact of re-rating.
In the corner.
As we continue to drive the full potential of the poor business, we benefit from the resiliency of our customer demand.
We continue to see, no evidence of customers trading down or delay services.
In fact, the percentage of customers using our premium products, through both sequentially and year-over-year across the network.
Lori Flees: We also saw transaction growth in our mature store base for the quarter. Our ticket growth was benefited by premiumization, net pricing, and improvements in NOCR service penetration. While we had a good comp result of 4.9%, we believe June was positive and impacted by a slower-than-normal start to the summer holidays. We remain confident in our same-store sales expectations for the full year and are narrowing our guidance range to 5.8% to 6.4%. Our team continues to manage our cost of sales to deliver long-term margin expansion and enhance shareholder value. Labor improvements drove the gross margin rate expansion this quarter through better labor management, especially from enhanced scheduling practices. In Q2, we discussed the expected impacts of tariffs in detail. While there continues to be uncertainty in the global trade discussion, our expectations of any impact to our financials are minimal and unchanged.
We are pleased to see continued transaction growth for our same store base.
We also saw transaction growth in our mature store base for the quarter.
Our ticket growth was benefited by premiumization. Net pricing and improvements in N OCR service penetration.
While we had a good comp result of 4.9%, We Believe, June, while positive was impacted by a slower than normal start to the summer holidays.
We remain confident in our same store, sales expectations for the full year and our narrowly, our guidance range to 5.8 to 6.4%.
Our team continues to manage our cost of sales to deliver long-term margin expansion and enhance shareholder value.
Labor improvements drove, the gross margin rate expansion, this quarter through better, Labor Management, especially from enhanced scheduling practices.
In Q2, we discussed the expected impact of tariffs in detail.
Lori Flees: As it relates to network growth, this quarter, we added 46 new stores, bringing our year-to-date total for gross store additions to 116, 114 net of the two closures in Q2. During Q3, we had a transfer of six stores from franchise to company ownership. This transfer was driven by strategic considerations to align markets and enable our franchise partners to concentrate their development efforts in markets where they are best positioned for growth. The strong delivery of stores this quarter, along with the stores already in construction and in the acquisition pipeline, gives us confidence in meeting our store addition targets for the year. We continue to track to the midpoint of the range, while recognizing, consistent with what we shared last quarter, that our pipeline is more back-end loaded this fiscal year. We're pleased with the continued momentum of new store pipeline growth, including our recently refranchised markets.
While there continues to be uncertainty in the global trade discussions, our expectations of any impact to our financials are minimal and unchanged.
As it relates to network growth, this quarter, we added 46, new stores, bringing our year-to-date totals for Growth Store. Editions to 116 114. Net of the 2 closed.
During Q3 we had a transfer of 6 stores from franchise to Company ownership.
This transfer was driven by strategic considerations to align markets and enable our franchise, Partners to concentrate their development, efforts and markets where they are best positioned for growth.
Strong delivery is stores. This quarter along with the store's already in construction and in the acquisition pipeline gives us confidence in meeting our store. Addition to targets for the year.
To continue to track to the midpoint of the range while recognizing consistent with what we shared last quarter that our pipeline is more back-end loaded. This fiscal year.
Lori Flees: The progress of both our company and franchisee development teams reinforces our confidence in delivering our network-linked targets and improving return on invested capital. I'd also like to give an update on the Breeze transaction. We continue to work diligently with the FTC on a path to close this transaction. This path to close could include a plan to divest certain stores subject to FTC approval, but we're still too early in the process to know the specifics, and there is uncertainty around the timing. We hope to close in late Q4 or early fiscal 2026, and we'll provide more information as soon as we're able. Before handing it over to Kevin to review our financial results, I want to officially welcome him to his first Valvoline earnings call.
We're pleased with the continued momentum of new sore pipeline growth, including our recently refused.
Progress of both our company and franchisee development teams, reinforce our confidence in delivering our Network growth targets, and improving return on invested capital.
I also like to give an update on the breeze transaction, we continue to work diligently with the FTC on a path to close this transaction.
This path to close, could include a plan to divest certain stores, subject, to FTC approval.
But we're still too early in the process to know the specifics and there is uncertainty around the timing.
We hope to close in late Q4 or early fiscal 2026.
And we'll provide more information as soon as we're able.
Lori Flees: As expected, he's quickly getting up to speed on how Valvoline's business looks today, and I appreciate the strong financial expertise he brings to the team. With that, I'll turn it over to Kevin.
Before handing it over to Kevin to review our financial results. I want to officially welcome him to his first valine earnings call.
Kevin Willis: Thanks, Lori. Glad to be with everyone today. Since joining, I've spent considerable time with our teams and on the road meeting with investors. This is a great company with a lot of growth opportunities to drive shareholder value, and I'm excited to be a part of it. Let's turn to slide 6 and take a more detailed look at our financial results for the third quarter. Net sales increased 4% on a reporting basis and 12% when adjusted for the impacts of refranchising. System-wide, same-store sales increased 4.9% and 12% on a two-year span. The majority of the comp growth for the quarter came from increased ticket with premiumization, net pricing, and increased NOCR service penetration, all contributing. Transactions also continue to grow, and without the Easter headwind, transactions would have contributed roughly a third of the comp.
As expected, he's quickly getting up to speed on how valve's business looks today, and I appreciate the strong financial expertise. You bring to the team with that. I'll turn it over to Kevin.
Thanks Lori. Glad to be with everyone today.
Since joining, I have spent considerable time with our teams and on the road meeting with investors. This is a great company with a lot of growth opportunity to drive shareholder value, and I'm excited to be a part of it.
Let's turn this line 6 and take a more detailed. Look at our financial results for the third quarter.
Net sales, increased 4% on reporting basis and 12% when adjusted for the impacts of refunds.
systemwide same store sales increased 4.9% and 12% on a 2-year second
The majority of the cup growth for the quarter came from increased ticket with premiumization net, pricing and increased anak service penetration, all contribute.
Kevin Willis: Similar to Q2, we're seeing stronger same-store sales growth from the franchise stores. Pricing actions taken by some of our large franchisees continue to be a key driver. Turning to the next slide, we'll take a look at the financial drivers for the quarter. Gross margin rate increased 80 basis points year over year to 40.5%. This was primarily driven by labor leverage of more than 100 basis points, partially offset by increased depreciation from the addition of new stores of about 50 basis points. As Lori mentioned, we've continued to improve our labor management through enhanced demand planning, which leads to improved scheduling. SG&A as a percent of sales increased 80 basis points year over year to 18.5%, reflecting our previously discussed investments in technology infrastructure. Our technology investments accounted for about one-third of the SG&A increase over prior years.
Transactions. Also continue to grow and without the Easter headlining transactions would have contributed roughly a third of the cost.
Turning to the next line. We'll take a look at the financial drivers for the quarter.
Gross margin rate, increased 80 basis points year-over-year to 40.5%.
This was primarily driven by labor, leverage of more than 100 basis points, partially offset by increased depreciation. From the addition of new stores to about 50 basis points.
As Laurie mentioned, we continue to improve our Labor Management through enhanced demand planning, which leads to improved schedule.
Percentage sales increased 80 basis points year-over-year to 18.5%.
Reflecting our previously discussed. Investments in technology infrastructure.
Kevin Willis: Year over year, when adjusted for refranchising, SG&A increased generally in line with the sales increase. We expect year over year SG&A leverage to return in fiscal year 2026. Sequentially, SG&A as a percentage of sales increased 80 basis points. On an absolute basis, sales growth outpaced SG&A growth in the quarter. Adjusted EBITDA margin increased 30 basis points to 29.5%. On slide 8, we'll take a look at overall profitability. Similar to the previous quarters this year, the refranchising transactions impact the comparisons to the prior year. We delivered strong profit growth with adjusted EBITDA of $130 million, a 12% increase over the prior year considering the impacts of refranchising, and adjusted net income of $61 million. Adjusted EPS of 47 cents increased 18% considering the refranchising impacts.
Our technology Investments accounted for about 1, third of the sgna increase. Over prior year.
Year-over-year, when adjusted for reranch testing sgna increased generally in line with the sales increase, we expect year-over-year, sgna leverage to return in fiscal year 2026.
sequentially sgna is a percentage of sales decreased 80 basis means on an absolute basis sales growth outpaced sg&a growth in the board
I'm Justin Eva done, margin increased 30 basis points to 29.5%.
On slide 8. We'll take a look at overall profitability.
Similar to the previous quarters this year, the refrag transactions impact the comparisons to the prior year.
We delivered strong profit growth with adjusted, even dawn of, 130 million, the 12%, increase over the prior year, considering the impacts of brief franchising and adjusted, net income of 61 million.
Kevin Willis: We finished the quarter with approximately $68 million in cash and a leverage ratio on a rating agency-adjusted basis of 3.3 times. Turning to slide 9, you will see our updated outlook for the year. Across the board, we expect to fall within the prior outlook and have tightened the most ranges. Lori already covered same-store sales and network growth. Share repurchases are $60 million year to date, having been paused following the Breeze announcement. For sales and EPS, we narrowed the ranges around the midpoint, and we raised the low end of the adjusted EBITDA range based on performance to date. With that, I'll turn it back over to Lori.
Adjusted EPS of 47 cents increased 18%, considering the referencing impacts.
We finished the quarter with approximately 68 billion dollars in cash and the leverage ratio on a rating agency adjusted basis of 3.3 times.
Attorney's, slide 9, you will see our updated outlook for the year across the board. We expect to fall, within the prior Outlook, and have tightened the most ranges Lori already covered same store, sales and network group.
Share repurchases are $60 million a year to date having been paused following the breeze announcement.
For sales and EPS, we narrowed the ranges around the midpoint and we raised the low end of the adjusted Eva time range based on performance to date.
Lori Flees: Thanks, Kevin. Before we wrap, I want to thank our 11,000-plus team members and our franchise partners whose hard work helped deliver the strong revenue, profit, and store growth this quarter. We're grateful for their ongoing dedication as we are fully into the summer drive season. We feel good about where our performance will land for the year and are narrowing most of our guidance ranges. We have a resilient and durable business model that positions us well to deliver strong performance and long-term shareholder value. Now, I'll turn it back over to Elizabeth for Q&A.
With that, I'll turn it back over to Lori.
Thanks Kevin. Before we grab, I want to thank our 11,000 plus team members and our franchise Partners, whose hard work, helped deliver the strong Revenue profit and store growth. This quarter we're grateful for their ongoing dedication as we are fully into the summer dress season
You feel good about where our performance will land for the year and our narrowing most of our guidance ranges.
We have a resilient and durable business model that positions us well to deliver strong performance and long-term shareholder value.
Elizabeth Clevinger: Thanks, Lori. Before we start the Q&A, I want to remind everyone to limit your question to one in the follow-up so that we can get to everyone on the line. With that, operators, can you please open the line?
Now, I'll turn it back over to Elizabeth for Q&A.
Thanks Lori. Before we start the Q&A, I want to remind everyone to limit your question to 1 and a follow so that we can get to everyone on the line.
With that, operator, can you please open the line?
Becky: Yep, thank you. If you wish to ask a question, please press * followed by 1 on your telephone keypad now. If for any reason you want to remove your question, please press * followed by 2. When preparing to ask your question, please ensure your device is unmuted locally. Our first question comes from Mark Jordan from Goldman Sachs. Your line is now open. Please go ahead.
Yep. Thank you. If you wish to ask a question, please press star. Followed by 1 on your telephone keypad now.
If any reason you want to remove your question, please press star followed by 2.
When preparing to ask your question, please issue, your device is unmuted locally.
Our first question comes from Mark Jordan from Goldman Sachs.
Mark Jordan: Hey, thank you for taking my question. You know, I guess as we think about going forward, all your same-store sales growth guidance implies a pretty wide range of outcomes for Q4. Can you talk about the different scenarios you see playing out there that might lead you to the high end and low end of the range?
Your line is now open. Please go ahead.
Hey thank you for taking my question. Um you know I guess as we think about going forward for your same store sales growth guidance implies a pretty wide range of outcomes for 4. Can you talk about the different scenarios? You see playing out there that might lead you to the high end and low end of the range?
Kevin Willis: Sure, Mark. First, just a little bit about the comp for the quarter. We're definitely pleased with the financial performance of the business in the quarter. Good growth across the board for every key metric. We're happy about that. I think April and May performed in line with our expectations, with good comps. As Lori mentioned, we did see a slow start in June, or a slower start to the summer holiday season. And that said, we did see consistent transaction growth across the entire system each month, including in our mature stores. Transaction growth accounted for about 25% of the comp. Going forward, and we've talked about this a fair bit, we expect to see a good impact and good growth both in terms of transaction and ticket.
Sure, Mark. Um first just a just a little bit about the cam for the court. We we're definitely pleased with financial performance fellow business in the quarter, uh, good growth across the board for every key metric. We're happy about that. The April and May performed in line with our expectations uh, with good costs. As Laurie mentioned, we did see a slow start in June um or slower or to the to the summer holiday season and that said, we did see consistent transaction growth across the entire system each month, including it on the tour.
Kevin Willis: As we look at Q4, we narrowed the range, and while you're right, the absolute math would imply a pretty wide range of outcomes. We're pretty focused on the midpoint of that range, and that would be our overall expectation for the quarter.
Going going forward. And we talked about this a fair bit. We we expect to see, uh, good impact and and and good growth both in terms of transaction and ticket. As we look at, as we look at Q4, we narrow the range and and while you're you're right, the absolute math would imply a pretty wide range of outcomes. We're and we're pretty focused on the midpoint of that range and that would be our overall expectation for the quarter.
Mark Jordan: Okay, perfect. Thank you very much. And then, you know, I think on the transactions were 25% of the comp there, so 75% or so were ticket. Can you break out the drivers of ticket, the magnitudes there, NOCR, net pricing, and premiumization?
Kevin Willis: Yeah, all were contributors to ticket in the quarter. We don't really break those out specifically in terms of exact numbers, but all were contributors in the quarter, both for company stores as well as for franchise stores. So we were pleased with that, I would say, across the board on an overall basis.
Okay, perfect. Thank you very much and then, um, you know, I think on the transactions are 25% of the comp there. So 75% or so we're ticket. Can you break out the drivers, the ticket, the magnitudes there, um, noocracy and uh, premiumization
Yeah. All all all we're contributors to to ticket in, in the, in the corner we don't we don't really break those out specifically in terms of of, of exact numbers, but all we're contributors in the quarter, uh, both for both for company stores as well as for franchise stores. So, we were, we were pleased with that. I would say across the board on an overall basis.
Mark Jordan: Great. Thank you very much, and congrats on the quarter.
Elizabeth Clevinger: Thanks.
Great, thank you very much and congrats on the quarter.
Becky: Thank you. Our next question comes from Steven to Counseling City. Your line is now open. Please go ahead.
Thank you.
Our next question comes from Stephen sewn from City. Your line is now open. Please go ahead.
Steven Shemesh: Great. Good afternoon, or good morning. Thanks very much for taking my question. I wanted to follow up on the previous question. Can you just help us understand a bit more, maybe what you saw in June? Do you think it was weather? Do you think it's some macro impact? And then, you know, just given the guidance for the fourth quarter, we can kind of do the range. What are you seeing thus far in July? Like, have you seen a bit of an improvement versus what you saw in June?
Great, good afternoon or good morning. Thanks very much for taking my question. Um, I wanted to follow up on the previous question. Can you just help us understand a bit more? Maybe, what you saw in June? Do you think it was? Whether do you think it's some, some macro impact and then, you know, just given the guidance for the fourth quarter, we can kind of do the range. What are you seeing this far in July? Like have you seen a bit of an improvement versus what you saw in June?
Lori Flees: Yeah, thanks, Steven, and good morning. Overall, we feel, you know, June started a little slow relative to the summer holiday season. But when we step back, you know, the resiliency of the customer base is still incredibly strong. We're not seeing customers trade down or defer service, but there was some timing. And I think some of that could have been the mild weather and the rain. We typically, you know, see that just slide volume around. And I think that was a contributor for June. However, as we went into July, those, not that weather went away completely, but the hot weather came back. I think the summer holiday season and the driving picked up. We saw, you know, good traffic. Obviously, we have some benefit in July because of crowd strike last year. So we have a bit of tailwind.
Yeah, thanks, Steve, and good morning. Um,
Overall.
We feel, you know, June started, a little slow um relative to the summer holiday season. But when we set back, you know, the resiliency of the customer base is still incredibly strong. We're not seeing customers trade down or defer service.
But there was some timing and I think some of that could have been the mild weather in the rain. Um, we typically, you know, see that just slide volume around. Um and I think that was a contributor for June. However, as we went into July, those
Lori Flees: But if we take that impact out, we feel really good around transaction performance as we move through the month of July. And we feel very good about the momentum of the business, which is, you know, why our guide and narrowing is is slightly up from the previous midpoint.
Not that whether, um, went away completely. But the, the hot weather came back. I think the the summer holiday season and the driving picked up. We saw, you know, good traffic. Um, obviously we have some benefit in July because of crowdstrike last year. So we have a bit of Tailwind, but if we take that impact out, we feel really good around transaction performance. Um, as we move through the month of July, and, uh, we feel very good about the momentum of the business, which is, you know, why our guide and narrowing is, is slightly up from the previous midpoint
Steven Shemesh: Okay, that's helpful detail. And then I'm going to ask a question just, you know, how should we start to think about same-store sales planning for next year? Since you clearly have confidence you're going to be able to return to SG&A leverage, maybe just help us think about the preliminary planning for same-store sales growth next year.
Okay, that's helpful detail. I'm going to ask the question just, you know, how should we start to think about same-source sales planning for next year? Since you clearly have confidence you're going to be able to return to STMA leverage, maybe just help us think about the preliminary planning for same-source sales growth next year.
Kevin Willis: Sure. While it's a bit too early to comment on fiscal 26, I can say that we and the entire team are engaged in and working on plans for the upcoming year, and we'll be excited to share those plans a little bit later at a more appropriate time. In terms of SG&A, we're definitely pleased that SG&A growth is moderated as we expected it to. And as we indicated in comments, technology investments are mostly done, I would say, and accounted for about a third of the year-over-year SG&A growth. As we fully lap those investments, which should happen early in fiscal 26, we should expect SG&A leverage to return in 2026.
Sure. Um, while it's a, it's a bit too early to comment on fiscal 26. I can say that we in the the entire team are engaged in and, and working on plans for the upcoming year and we'll be excited to to share those plans. Um, a little a little bit later uh at the more appropriate time in terms of sgna, um, we're we're definitely pleased with sgna. Growth is moderated as we expected it to
Lori Flees: And I'll just add, Steve, that, you know, the fundamentals of the... Sorry, Steve, I was just going to add to what Kevin said. The fundamentals of the business have not changed. You know, we've been talking about the same drivers here, you know, since I joined the company. And really, the only significant change is really the inflationary environment. And so the fundamentals that we're seeing around ticket contribution, you know, and having a healthy mix of that coming from ticket, sorry, ticket and transaction on the ticket side from continued opportunities and NOCR pricing and premiumization, combined with the growth in our customer base, you know, the fundamentals of our business haven't changed, for the most part. The biggest thing is the inflationary environment.
And as we indicated in comments, technology. Investments, um, are mostly done. I would say. And as a counter for about a third of the year-over-year sgna growth that as as we fully lap those Investments uh which which should happen early in fiscal 26, we should expect. That's generally leverage to return in 2026.
and I I'll just say I see
I was just going to add to what Kevin said, the fundamentals of the business have not changed, you know, we've been talking about the same drivers here. Um, you know, since I joined the company and really the only significant change is really the inflationary environment.
Lori Flees: So I think, you know, considering what we're seeing in the market today, which is just a continuation of great tailwinds, great execution, you know, I think you'll continue to see strong same-store sales growth from us, and and and continuation of a growing share.
Sorry to get in transaction on the ticket side from continued opportunities in nokram premiumization, uh, combined with the growth that our customer base, you know, the fundamentals of our business hasn't changed. Um, for the most part, the biggest thing is the inflationary environment. So, I think, you know, considering what we're seeing in the market today, which is just a continuation of great Tailwind, great execution. You know, I think you'll continue to see strong same store sales growth from us. Um and and and continuation of growing shares.
Steven Shemesh: Great. Thanks for all that detail. Best of luck.
Great. Thanks for all the details. Best of luck.
Becky: Thank you. Our next question is from Simeon Gutman from Morgan Stanley. Your line is now open. Please go ahead.
Uh, next question is from Simeon. Gutman from Morgan Stanley. The Line is now open. Please go ahead.
Mark Jordan: Hey, good morning, everyone. My first question on transactions and ticket. How are you doing? So this one-third, two-third, we've been, I think, in this mode for a bit. It used to be a little more balanced. So could it get to be more balanced? And then getting to a slightly higher sustainable comp rate, do you need the transactions to lift? And is that expected to happen, or is this the new normal?
Hey, good morning, everyone.
Uh, my first question on transactions and ticket, how you doing?
This 1-3 23 we've been I think in this mode for a bit it used to be a little more balanced so could it get to be more balanced and then getting to a slightly higher sustainable comp rate? Do you need the transactions to lift and is that expected to happen or is this the new normal?
Kevin Willis: So I think as we see newer stores start to mature, we will see transactions tick up. We do want to continue to work towards tracking that balance between ticket and transaction. As Lori indicated, in the past few years, we've been in a very inflationary environment. And by default, ticket has played a larger role in the comp. I think as we go forward in assuming a more moderate inflationary environment, we should see a more balanced view in combination of ticket and transaction. That's our expectation. And, you know, again, it's maturing the existing network. It's working towards stores to continue to grow and is growing the base footprint as well.
So I I think as as we see newer stores start to mature, we we will see transactions tick up. Uh, we we do want to continue to work towards tracking that balance between ticket and transaction is Lori indicated.
Lori Flees: And Simeon, I'd just say that adding to what Kevin's saying, in this quarter, we did have the headwind of Easter, which impacts transactions. So at about, you know, 25 north of 25% of our comp being from transactions, when you take that out, it was significantly higher when you factor in the Easter flip. And we're consistent with what we've seen in the first half of the year. So we're not quite, you know, always hitting a 50/50 balance. And I think that is, you know, that's hard to strike exactly, but we would be hoping to be more in that balance range over time. We do have, yep, some headwinds on the ticket side, which will continue.
In, in the past few years we've been, we've been in a very inflationary environment and by default ticket has played a, a larger, a larger role in comp I think as we as we go forward and assuming assuming more moderate inflationary environment, we we should, we should see a more balanced more balanced view in combination of of ticket and transaction. That's our expectation. And you know again it's it's maturing the existing Network. It's working with the tour stores to continue to grow. Uh, is growing and growing the base footprint, as well and to me, and I just say this and adding to what Kevin's saying in this in this quarter, we did have the headwind of Easter which impacts transactions. So at, uh, you know, 25 north of 25%, of our account being from transactions. Um, when you take that out, it was significantly higher, um, when you factor in the Easter, flip in more consistent with what we've seen.
In the first half of the year. So we're not quite, you know, always hitting a 50-50 balance and I think that is, you know, that's hard. Hard to strike. Exactly. But we would be hoping to be more in this balanced range over time. Um, we do have
Lori Flees: And our favorite premiumization is going to continue as we see the car park evolve and the number of cars where the OEM is recommending a full synthetic lubricant, you know, is growing. So we do have some tailwind, which will continue to keep that ticket momentum strong. but again, I think we are getting to much more balance than what you've seen, from us in the last over the last three years.
Some headwinds on the ticket side which will continue um in our favor premiumization is going to continue as we see the car park evolve and and the number of cars were the only ones recommending a full synthetic lubricant. You know is growing. So we do have some Tailwind, which will continue to keep that ticket momentum, strong. Um, but but again, I think we are getting to much more balanced than what you've seen um from us in the last over the last 3 years.
Mark Jordan: And then a follow-up, and it's related. If you look at the immature stores that are ramping, the oil changes per day, so I guess that would be your, you know, the transaction gauge. Those ramps are normal, below average, above average? How would you characterize them?
And then a follow-up and its related.
if you look at the immature stores that are ramping,
The oil changes per day. So I guess that would be your, you know, the transaction gauge those. Those ramps are
normal.
Below average above average. How do you? How would you characterize them?
Lori Flees: So, Simeon, it's a great question and something that we review on a regular basis, looking at, what plan do we put in place for each of the stores that we put, you know, that we went to build or to buy and are they on track? And the good news, and by the way, we approve those based on the return on invested capital that we're going to, that we expect to get. And again, there's incredible consistency around the performance of our new store ramps relative to that that set plan at the time we make the approvals. So we continue to see very good performance from our new store base. and those stores are expected to return, again, mid to high mid-teens, in terms of return on invested capital. So, so really positive performance from our our new store base.
So Sydney, it's a great question and something that we we review on our regular basis. Looking at um what plan did we put in place for each of the stores that we put? You know, that we went to build to buy? And are they on track and the good news? And, and by the way, we approve those based on the return on investment Capital that we're going to that, we expect
To.
Get. And again, there's incredible consistency around the performance of our new store ramps relative to that that set plans at the time we make the approvals, so we continue to see very good performance from our new store base. Um, and those stores are expected to return again, mid to high mid teens, um, in terms of return on invested Capital. So still really positive performance from our, our new store base,
Mark Jordan: Okay. Thanks. Good luck, everyone.
Lori Flees: Thank you.
Becky: Thank you. Our next question comes from Mike Harrison from Seaport Research Partners. Your line is now open. Please go ahead.
Stolen. It's not open. Please go ahead.
Mike Harrison: Hi, good morning. Welcome to Kevin. I'm looking forward to working with you again.
Mark Jordan: Thanks, Mike.
Hi, good morning. Uh, welcome to Kevin uh looking forward to working with you again.
Mike Harrison: To the extent that average ticket is going up, I was hoping we could dig in a little bit on how much of that is pure pricing. Presumably, you guys are responding to some higher costs for parts or filters or maybe some increases in labor costs and trying to push pricing. You also noted some incremental pricing actions by your franchisees as well. So I was just wondering if you could give us any help around quantifying that pure pricing component of average ticket, really just trying to get a sense of how much pricing momentum could be reflected in average ticket into next year.
That's fine.
To the extent that average ticket is going up. I, I was hoping we could dig in a little bit on how much of that is pure pricing. Presumably, you guys are responding to some higher costs for parts or filters or or maybe some, some increases in labor costs and and trying to push prices. You also noted some incremental pricing actions by your franchisees as well. Um, so I was just wondering if you could give us any help around, quantifying that that pure pricing component of average ticket, really just trying to get a sense of how much pricing momentum, uh, could be reflected in average, ticket into next year.
Kevin Willis: Sure, Mike. First, I'll address the franchisee question. We did have one large franchisee that made some price adjustments. We talked about that last quarter. That's continuing to impact the comp on the franchise side versus the company side. Over time, we'll lap that, but we do still see that. I think as you look at the price portion of the equation from comp, where we see a lot of opportunity is in continued growth and premiumization, as well as NOCR. And NOCR has a lot of room to grow, both on an overall basis within the company and system, as well as improving the gap between our lower quartile performers in our system versus the higher quartile performers. You know, in terms of price-related and potential cost to it, we talked about tariff impact last quarter. Nothing really changed there.
Shure mic. Uh, first off, I'll address the franchisee question. You did have 1 large franchise that that made surprise adjustments. We talked about that. Uh, last quarter, that's continuing to impact the top on the franchise side versus the, the company side. Um, over over time. We'll, we'll laugh that, but but we do still, we do still see that. I think as you as you look at, uh, the price portion of of the equation from comp, um, where we see where we see a lot of opportunities in is in
Kevin Willis: And we did give an indication of expected impact on operating cost based on the environment at the time. It hasn't changed all that much. And you know, certainly, this is an industry that that tends to take inflation, get inflation back via price, and that would be our expectation. But you know, in the end, the larger contributors to ticket are going to be those actions that we take from the store from an execution perspective around premiumization, which again, car park impacts that, and of course, NOCR, with pricing just on an absolute basis being a much smaller component than that typically.
Continued growth in premiumization, as well as anak and in, in a anak has a lot of room to grow, uh, both on an overall basis within the company and system, uh, has as well as improving improving the gap between our lower core top performers in in our system versus the higher core top performers. You know, in in terms of of price related to potential cost head was we we talked about tariff, in fact, last quarter. Um, nothing's really changed there. And we we did give given indication of of expected impact of operating cost based on the environment of the time. It hasn't changed all that much. And you know certainly this this is an industry that that intends tends to take inflation uh get inflation back via price and and that would be our expectation. Uh but you know, in in the end the larger contributors, the larger contributors to ticket are going to be those actions that we
We take from the store from an execution perspective, around premiumization which again car market impacts that uh and and of course NCR um with with pricing just about an absolute basis being much smaller components than typically.
Lori Flees: Yeah, I would just say, Mike, we've always talked about there being balance across the three. I think where Kevin's coming from is the car park evolution driving the premiumness and the NOCR penetration upside. It's certainly been strong contributors for us over the past 12 to 18 months. But pricing has been a contributor. And we continue to review our pricing and do pricing tests actively in the marketplace. And price was a very good contributor, not out of line of the expectations that we talked about in our long-term algorithm minus significant inflation. So we'll continue to look at our pricing. I do think we have taken at least one regional action relative to cost in that region. But that was not pervasive yet.
um,
yeah, I would just say, like, we've always talked about, um, there being balanced across the 3. I think, where Kevin's coming from, is the, the car park Evolution driving the premium this, um, and the
um, and the NOC are penetration upside. It's certainly been strong contributors for us.
Over the past 12 to 18 months, but pricing has been a contributor and we can send you to review our pricing and do pricing tests.
Um, I am actively in the marketplace and price was a very good contributor, not out of line with the expectations that we talked about in our long-term algorithm minus significant inflation.
Lori Flees: So while in my comments, we talk about no significant tariff impacts, as we have those, we will either find ways to mitigate them through other cost reductions, or we will pass those through to consumer. But right now, we haven't taken pricing across the board to mitigate any new labor and/or product costs.
So we'll continue to look at our pricing. I do think we have taken at least 1 Regional action relative to cost in that region. Um but that was not for pervasive yet. So while in my comments we talk about no significant of care of impacts. As we have those, we will either find ways to mitigate them through other cost reductions or we will pass this through to Consumer. Um, but right now we have been taken pricing across the board to mitigate any new, um, new labor and or product costs.
Mike Harrison: All right. Very helpful. Thank you. And then I had a couple of questions related to acquisitions. I see that you acquired eight stores in the quarter. Was that one transaction or multiple transactions? And I'm just hoping that maybe you can give us some color on what the pipeline of store acquisitions looks like. It seems like maybe you're still moving forward on some of these smaller deals, even with the Breeze transaction kind of pending here.
Lori Flees: Yep. Great question, Mike. So during Q3, we purchased six stores from e-franchisees with one transaction. The transfer was driven by really us stepping back, looking at how the markets were aligned geographically, as well as where the franchise partners' development efforts and markets were best positioned. And this was a mutual decision between us and the franchisee that they actually wanted to focus their development in other areas. And so we got to a very good outcome to transition those stores to company ownership. They are in the Louisiana market. It's a market that we think there's a lot of opportunity. And we actually have company markets that are adjacent. So from a G&A standpoint, it's actually synergistic with the company side versus if it was isolated from the franchisee that was operating.
All right, very helpful. Thank you. And then I had a couple questions related to Acquisitions. Uh, I see that you acquired 8 stores in the quarter. Uh, was that 1 transaction or multiple transactions? And I'm just, uh, hoping that maybe you can give us some color on what the pipeline of of store Acquisitions looks like, it seems like maybe you're, you're still moving forward on some of these smaller deals even with the breeze transaction, uh, kind of pending here.
Lori Flees: And so we'll continue to, I think, look at they're really just small opportunities, and they'll go in both directions, but it'll it will never be more than a handful of stores. I think as it relates to our pipeline, we continue to have, you know, there are over 4,000 independent food operators. And there's always, from time to time, independent players who want to make a transition. And they, you know, they don't have, they're not going to pass it on to the next generation. And they want to make sure their people are taken care of. So they look to companies like Valvoline who can step into that business, pay them a fair market price, and take care of their people. We continue to use that strategy. The returns on invested capital for acquisitions are incredibly strong.
How the markets were aligned geographically. As well as where the franchise partners of development efforts in markets were best positioned. And this was a mutual decision between us and the franchisee. That they actually wanted to focus their development in other areas and so got to a very good outcome to transition those stores to Company ownership. Uh, they are in the Louisiana Market. Um, it's a market that we think there's a lot of opportunity. Um and we actually have company markets that are adjacent. So from a GNA standpoint it's actually um synergistic with the company side versus their. It was isolated from the franchisee that was operating. Um and so we'll continue to
Um, I think look at they're really just small opportunities and they'll go in both directions but it'll allow. It will never be more than a handful of stores.
I think as it relates to our pipeline, we continue to have, you know, there are over 4,000 independent food operators,
Um, and there's always from time to time um independent players who want to make a transition. Um and they, you know, they don't have, um, they're not going to pass it on to the next generation, and they want to make sure there are people are taking care of. So they look to companies like boweling, who can step into that business, play them pee them, a fair market Price, and
Lori Flees: And we have a playbook, so we know how to convert those stores. We continue to build our pipeline. You know, the Breeze transaction is still pending, and we're still working hard toward it. But we continue to talk to the independent players that we've been talking to about their timing. And where it makes sense for us to invest a road and get a good return, we'll do that.
Take care of their people. Um, we continue to use that strategy, the returns, um, on invested capital for Acquisitions are incredibly strong, um, and we have a Playbook, so we know how to convert those stores, we continue to build our pipeline. Um, you know, the breeze transaction is still pending and we're so working hard toward it, um, but we continue to talk to the independent players that we've been talking to about their timing and where it makes sense for us to invest in growth and get inclusive returns, we'll do that.
Mike Harrison: All right. Thanks for that. I did just want to clarify, though, there were there were six conversions from franchisees, but it looks like there were also eight acquired stores. Was that one transaction or multiple?
Lori Flees: Oh, multiple on the eight. Sorry. Like, I was just focused on the transfers. There were multiple. Most of the acquisitions that we do now, a majority of them are single-store operators or a couple of store operators.
All right, thanks for that. I did just want to clarify though. There were there were 6. Conversions from franchisees, but it looks like there were also 8 required stores was, was that 1 transaction or multiple?
Multiple on the 8. Sorry, I was just focused on the transfer.
There were multiple.
most of the
now are
majority of them are single store. Operators are a couple of store operators.
Mike Harrison: All right. Thank you very much.
All right. Thank you very much.
Becky: Thank you. Our next question, it comes from Steve Shamesh from RBC Capital Markets. Your line is now open. Please go ahead.
Your line is now open. Please go ahead.
Steven Shemesh: Hey, good morning, and thanks for taking the question. Wanted to ask two on Breeze, and I'll throw them both out there. First, the Breeze stores do about $1 million in sales per store versus an average Valvoline, about $1 million seven. So first one is, structurally, is there any reason for that gap? And then secondly, as we think about integrating Breeze onto the platform, you know, from an SG&A standpoint, we're lapping over the tech. We're talking about getting back to leverage. Are there any costs associated with the deal that might throw a wrench in that plan?
Hey, good morning, and thanks for taking the question. Wanted to ask too on, uh,
Breeze, and all.
out there, uh, first
The breeze doors, do about a million dollars in sales per store versus an average valine about a million 7. So, so first, 1 is structurally. Is there any reason?
For that Gap. And then secondly, as we think about um integrating Breeze onto the platform, you know from an sgna standpoint, we're lapping over the tech. We're talking about getting back to leverage. Are there any costs associated with the deal that uh might throw a wrench in that plan?
Lori Flees: Yeah, good question. Thanks for asking, Steve. So first of all, when we look at the performance of the Breeze stores, they've been building that network relatively quickly. So the level of maturity of those stores varies. But given its size, it would be more heavily weighted to less mature stores. So that'll obviously be an impact. Second is the amount that is being invested in marketing and fleet activities is different. And that's because, you know, they're building a brand. Well, that brand has been in the marketplace for a long time, and they expand geographically. If they're not right-sizing the marketing and have the technology, the tools, and the customer data, and the things that we've invested in building over many years, it's going to take more time to build that volume across those basis stores.
Yeah, good question. Thanks for asking and see you. So, first of all, when we look at the performance of The Breeze Stores, um, they've been building that Network relatively quickly, so the level of maturity of those stores varies. Um, but given its size would be more heavily weighted, so less mature stores, so that'll obviously be an impact. Um, second is the amount that is being invested in marketing and fleet activities. Um, is, is different and that's because, you know, they're building a brand, well, that brand has been in the marketplace for a long time as they expand geographically. Um, if they're, if they're not right sizing, the marketing and
Lori Flees: So we think those are all contributors, and it's part of the reason why the acquisition was attracted to us, and we believe that it will provide a very strong long-term shareholder value return. In terms of the cost, the good side about the Breeze business is that it actually operates very similarly to Valvoline. So these are pitted stores. They, you know, in the way their service menu is largely similar, although they don't provide all of the services that we do in our BIOC business. So there's some upside there, too. But in terms of cost, we'll have the normal, you know, we'll want to make sure we look at safety, but this is a team that focuses on our people. So we don't expect to have, you know, I'm sure there will be small surprises as we get the okay to move forward.
Have the technology and the tools and the, and the customer data, and the things that we've invested in building over many years, it's going to take more time to build that volume across those basic stores. So we think those are all contributors and as part of the reason, why the acquisition was attracted to us and we believe that it will uh, it will provide a very strong long-term shareholder value returned. Um, in terms of the cost.
The the good side about, uh, the breeze business, is it it actually operates very similarly to Value. So, these are are pitted Stores. Um,
Lori Flees: But we don't see any major significant stumbling blocks or capital investments at this time and based where we are in the process.
they, you know, and the way their service menu is is largely similar, although they don't provide all of the services that we do in our cioc, uh, business. So there's, there's some upside there, too. Um, but there in terms of costs, we'll have the normal, you know, we'll, we'll want to make sure we look at safety. But this is a team that focuses on our people. So, we, we don't expect to have, you know, I'm sure there will be small surprises as we as we get the okay to move forward. But we don't see any major significant stumbling blocks or Capital Investments at this time, um, and be where we are in the process.
Steven Shemesh: Got it. Thanks very much.
Got it. Thanks very much.
Becky: Thank you. Our next question, it comes from David Bellinger from Mizuho. Your line is now open. Please go ahead.
Steven Shemesh: Hey, good morning. Thanks for the questions here. I want to follow up on the franchise side. It seems like at least one of these large franchisees was taking more price. You spoke to that, and it may be more price just across the board on the franchise platform. Can you speak to the magnitude of that differential versus company-owned? Any consumer pushback in those markets? And if not, should the company-owned pricing close that gap over the next several quarters? Is that an opportunity for the core company-owned to push price a bit more forcefully going forward?
Thank you. Our next question comes from David Bellinger from Mizuho. Your line is now open. Please go ahead.
Hey, good morning, thanks for the questions here. I want to follow up on the the franchise side. It seems like at least 1 of these. Large franchises was taking more price, you spoke to that, maybe more price just across the board on the franchise platform. Can you speak to the magnitude of that differential versus company-owned any consumer push back in those markets. And and if not
Should the company owned pricing close that Gap over. The next several quarters is is that an opportunity for the core company owned to push price a bit more forcefully going forward?
Lori Flees: Yeah, thanks, David, for the question. When we look at our franchisee pricing, you know, some of that is geographically based. So we look at our franchisees that are, you know, a big portion of them are in the Northeast and in California. And so that does create some pricing differential. Labor costs and rent expense is higher, and they typically run a higher ticket also because of the car park. So that is a difference. In this last year, you know, our franchisees are independent price setters. So we do not, we do not tell them what they need to price. They do their own market studies based on the markets they're involved. And we had one fairly large franchisee who hired some new talent in their organization in the middle of last year and did some work and recognized that they were not priced with the market.
Yeah, thanks Davis for the question. Um,
when we look at our franchisee pricing, you know, some of that is geographically based so we look at our franchisees that are
You know, big portion of them are in the Northeast and in California and so that does create some pricing differentials uh labor costs and rents expenses higher and they're typically runs a higher ticket also because of the car park.
um, so that is a difference in this last year, you know, our franchisees,
Are independent price, setters.
So we do not we we do not tell them what they need to price. Um they do their own Market studies based on the markets they're involved.
Lori Flees: They were below the market. And so they did adjust their pricing in the fall, and it was across the board. And it was, I wouldn't say massive price, but it was significant. And they were not the only one to adjust price. Companies, we had price adjustments, and in other franchisees, they made price adjustments. But that one was an outlier and is creating a significant part of the difference in the pricing contribution to same-store sales between franchise and company.
And we had 1 fairly large franchisee who hired some new talents in their organization on the middle of last year, and did some work in recognized that they were not priced, uh, with the market. They were bolo the market,
And so they did adjust their pricing in the fall. Um, and it was across the board, and it was.
I wouldn't say massive price but it was significant and they were not the only ones to adjust price.
We had price adjustments, and in other franchises, they made price adjustments, but that 1 was an outlier and is creating uh, the significant part of the difference and the pricing contribution to same store sales between franchise and Company.
Steven Shemesh: Got it. Thanks for clarifying all that. And then just to pivot over to the tech investments, I think you mentioned a third of the SG&A growth this quarter. That could equate to something like 20 to 30 basis point impact. Is that the right level of SG&A margin we should get back next year as we move behind this smaller investment cycle within? Any way to frame what that potential could be into next year? Thank you.
Got it. Thanks for clarifying, all that. And then just to Pivot over to the the tech Investments.
I think you mentioned a third of the sjna growth, this quarter that could equate to something like 20 to 30 basis point impact, is, is the right? Is that the right level of sgna margin? We should get back next year as we move behind this. Uh, this smaller investment cycle within Opex, is any way to frame, what that potential could be into next year. Thank you.
Kevin Willis: Yeah, I think directionally, that's the right way to think about it. I think it's important to note that we would expect the leverage to improve throughout the course of the year. We do still have to lap some of those investments early in fiscal 26 that were done earlier in this fiscal year. So we will see, I would say, less leverage early in the year and growing throughout the course of the year. Again, the quantum is probably pretty close. But you know, as we look forward, I think historically, you know, based on the sales growth, we've seen SG&A growth, you know, grow kind of high single digits to low. Yeah, in the end, it's too early. It's really too early to say what fiscal 26 is going to bring.
Directionally. That's, that's the right way to think about it. Um, I think it's important to note that we we would expect. Um, The Leverage to improve throughout the course, of the year, we do still have to lap some of those Investments early in fiscal 26 that were done. You know, that were done earlier in this fiscal year so we we will, we'll see, you know, and say less leverage early in the year and growing throughout the course of the Year. Again, I think the quantum is is probably is probably pretty.
Kevin Willis: But directionally, as we see SG&A moderate this year, it would generally be our expectation to see leverage improve over the course of 26. Again, too early to actually size it at this stage of the game. And we'll provide you on that most likely in the next call.
Pretty close. Um, but you know, as as as we, as we look forward, I think, historically, you know, based on the based on sales growth, we've we've seen sgna growth, you know, growth kind of icing digits uh, to to, to low. Yeah. In, in the end it's it's too early. It's really too early to say what fiscal 26 is going to bring. But, but directionally, as as we see sgna moderate this year, it would generally be our expectation to to see leverage improve over the course of 26, again, 2 2, early too early to actually size it at this stage of the game and and we'll provide me the wrong that most likely in the next call.
Steven Shemesh: Got it. Thank you both.
Got it. Thank you both.
Becky: Thank you. Our next question, it comes from Peter Keith from Piper Sandler. Your line is now open. Please go ahead.
Thank you.
Thank you.
Uh, next question comes from Pisa. Keith from Piper Sandler.
The Line is now open. Please go ahead.
Steven Shemesh: Hi, good morning, Lori, Kevin. Elizabeth, Kevin, nice to meet you. I wanted to ask about the labor leverage. It saw 100 basis points of gross margin benefit. So that was fairly impressive. You're talking about taking advantage of new demand planning tools. So is there something unique to this quarter, or is this, you know, in the ballpark of the type of labor leverage you could see on a go-forward basis with similar comp performance?
Kevin Willis: Yeah, I think what's unique about this quarter is we're starting to see the impact of a lot of work that's happened over the course of prior quarters in terms of developing an approach and really driving overall better execution. And I think another key aspect of this is part of the tech investment stack that we've done was the implementation of Workday. As we continue to mature Workday, that should continue to provide us with opportunities to take a different look at how we're implementing labor across our store footprint, which should ultimately provide us with some opportunities to continue to improve that over the course of time.
Hi, good morning, uh, Lori. Kevin Elizabeth, Uh, Kevin nice to meet you. Um, I wanted to ask about the, uh, the labor leverage, uh, saw 100 basis points of gross margin benefits. So that was, uh, fairly impressive. You talked about, uh, taking advantage of new demand planning tools. So was there something unique to this quarter? Or is this um, you know, at some up in the ballpark of the type of Labor leverage, you can see on a on a go forward basis with similar comp performance.
Lori Flees: And some of that demand planning that's done is more sophisticated. So really thinking about the level of technicians that's required and the mix of technician skills. You know, as you get more sophisticated in the tools, you can start to right-size the wage rates that you need to cover the shift. And I think our team has been working through some of that demand planning, which then allows for the better scheduling. So it's really just the continuation of some of the things we've talked about, but just getting more sophisticated based on the tools that we have, exactly what Kevin said.
Yeah, I I think what's unique about this quarter is we're starting to see the impact of a lot of work. That's happened over, the course of Prior quarters in terms in, in terms of developing an approach and really driving overall better execution. And I think another, another key aspect of this, uh, is part of that Tech investment stack that we've done, was the implementation of workday as we continue to mature work day. That should that should continue to provide us with opportunities. To take a different look at, at how we're how we're implementing implementing labor across our store footprint, which should ultimately provide us, provide us with some opportunities to continue to prove that improve that over the course of time.
About.
The level of technicians that's required. And the mix of technician skills, you know, if you get more sophisticated in the tools, you can start to write size.
The the wage rates that you need to, to cover the shifts. And I think our team has been working through some of that demand planning which then allows for the best better scheduling
So it it's really just a continuation of some of the things we've talked about but just getting more sophisticated based on the tools that we have, um, exactly what Kevin said.
Steven Shemesh: Okay, that sounds exciting. And then I guess with Kevin on board, so I don't know if it's a question for Lori or for Kevin, but I think a lot of investors have been eager to see if you're going to put in place a new long-term comp growth framework. Is that still the plan, and is that something maybe you're thinking about with the fiscal Q4 print?
Okay, that sounds exciting. Um, and then um I guess what, with Kevin on board. So I don't know if it's a question for Lori or for Kevin, but I I think a lot of investors have been eager to see if you're going to put in place, a new long-term uh, comp growth framework. Uh, is that still, the plan and is that something? Maybe you're thinking about with the fiscal Q4 print,
Lori Flees: Yeah, absolutely. You know, we continue to evaluate the market environment. I think at the beginning of this year, there was so much uncertainty around how the macro environment was going to progress. Things have certainly been more stable for us than what we might have anticipated, though there's still some uncertainty. We feel really good about the momentum of the business. Obviously, the inflationary environment still holds some uncertainty. And having Kevin on board really allowed us to take a fresh perspective and figure out how we guide a long-term algorithm despite some of that uncertainty. So really having him on board has been a great time to help us think through that. You know, we are looking forward to sharing more at the right time and in the near future.
How the macro environment, um, was going to progress. Things have certainly been more stable for us than what we might have anticipated though. There are still some uncertainty. Um, we feel really good about the momentum of the business. Obviously, the inflationary environment still holds some uncertainty and having Kevin on board. Really a lot of us to take a fresh perspective and figure out how we guide a long-term algorithm despite some of that uncertainty. Um, so really having him on board is is been a great time to help us think through that.
Um, you know, we are looking forward to sharing more at the right time and in the near future.
Kevin Willis: And from where I've been being relatively new to the new to the story, or at least new to this version of the story, it has given me an opportunity to really step back and take more of a holistic look at the business, at the company, at the growth potential. And you know, it really is, you know, it really is a tremendous organization, a tremendous company. And there's, you know, there's a lot of growth ahead for this organization. And we are working to really size that and get the algorithm right so that we can communicate it and then very importantly deliver on that going forward.
from from
Where I being being relatively, being relatively new to them new to the story or at least new to this version of the story. Uh, it it it has given me an opportunity to really step back and take more of a holistic. Look at the business at the company and the growth potential. And and you know, it really is, you know, really is a tremendous organization tremendous company. And there's, you know, there's there's a lot of growth ahead for this organization and we we are working to to Really size that and get the algorithm, right? So that we can, we can communicate it and then very importantly, deliver them, but going forward,
Steven Shemesh: Very good. Thank you and good luck.
Very good. Thank you. And good luck.
Becky: Thank you. Our next question comes from Chris O'Call from Steeple. Your line is now open. Please go ahead.
Thank you.
Our next question comes from Chris call from Steve. The line is now open. Please go ahead.
Steven Shemesh: Thanks. Good morning, everyone. Lori, are you surprised that you may need to sell some of the Breeze shops to get approval, just given how fragmented the market is today? And does that influence your thinking about future opportunities, acquisition opportunities?
Thanks. Good morning, everyone. Um, Lori. Are you? Are you surprised that you may need to sell some of the breeze shops to get approval? Just given how fragmented the market is today?
And does that influence your thinking about future acquisition opportunities?
Lori Flees: So first of all, let's just say that the FTC has a normal approach that's not unique to us that looks at competition in the market. And this is the first acquisition of any scale in any recent years that they've looked at. So they really are looking to make sure that there's enough competition in the market to serve customers best. So I think their intentions are very consistent with where they have, you know, always focused. It's just, I think this is the first time it's been something in our space. In terms of the, you know, the discussions are really ongoing, and we're working with the FTC. One of the paths forward could be to sell a certain number of stores. We're obviously still working through those details. And I think it's a very constructive process. Now, we have to get the FTC to approve.
um so first of all, let's just say that the FTC is
Has a normal approach. That's not unique to us. That looks at competition in the market. Um, and this is the first acquisition of any scale.
In any recent years that they've looked at. So, there really are looking to make sure that there's enough competition in the market to serve customers best. So I think their intentions are very consistent with um, with with where they have, you know, always focused. It's just, I think this is the first time it's been something in our space.
um,
In terms of the, you know, the discussions.
We are really ongoing and we're working with the FTC. One of the paths forward could be to sell a certain number of stores. We're obviously still working through those details.
And and I think it's a very constructive process now.
Lori Flees: And so there is a process of requirements of that. But I think I'm encouraged by the progress that we've made today, the level of engagement that we're having. And ultimately, the path forward, you know, assuming the FTC agrees, will be consistent with our strategy, will drive long-term shareholder value, and have the benefit of extending our reach consistent with the overall growth strategy. So as I mentioned, I think on one of the fireside chats, you know, were we surprised? Yes. But when you actually get into the conversation, we shouldn't have been surprised. And it certainly doesn't change our growth story and the way that we look at it going forward. We're not getting any indication that there'll need to be a change in our strategy going forward.
We have to get the FTC to approve. And so there is a process of requirements of that. Um, but I think I'm encouraged by the progress that we've made today the love of Engagement that we're having. Um,
And ultimately, the path forward. Um, you know, will...
Assuming the FTC agrees, how will be consistent with our strategy? Will drive long-term shareholder value, and have the benefit of extending our reach consistent with the overall growth strategy. So as I mentioned, I think on, on 1 of the Fireside Chats,
You know, were we surprised? Yes, but when you actually get into the conversation, um, we shouldn't have been surprised, and it certainly doesn't change our growth story and the way that we will grow going forward. We're not getting any indication that there'll need to be a change in our strategy going forward.
Steven Shemesh: Okay. And then do you see any--I'm assuming you're going to be converting the brand to Valvoline. And I'm just curious, do you see any risk in converting the brand to Valvoline, just given the equity I'm sure that chain has in several other markets? You know.
Okay. And then do do you see any? I'm, I'm assuming you're going to be converting the brand to Valvoline and I'm just curious. Do you see any risk in converting the brand of albolene, just given the equity? I'm sure that chain has in several other markets.
Lori Flees: It's a great question. We're really focused on the FTC process to get to a closing of the transaction. And that has actually limited some of the discussion that we've had with Eric and his team. But we absolutely recognize that there is a loyalty that has been built up across that chain, not just with customers, but with the people. And at the end of the day, the people are what drive the experience for those customers. So we absolutely have to be thoughtful around how we integrate. But that's not new for us. So we, as was mentioned in a previous question, we acquire independent operators and have acquired previous chains. And so really thinking through how we make those conversions is something that we have experience in, and it's something that we work with the teams that will be, you know, coming on board with our company.
You know.
To get to uh, the closing of the transaction and that has actually limited some of the discussion that we've had with Eric and his team. Um, but we absolutely recognize that there is a loyalty that has been built up and across that chain. Not not just with customers, but with the people and at the end of the day, the people are what drives the experience for those customers.
so we absolutely have to be thoughtful around how we integrate, but that that's not new for us, so we
Lori Flees: And so I feel very good about, you know, how that can progress given our experience. But obviously, every situation is unique.
An operators and have acquired previous chains. And so really thinking through how we make those conversions is something um, that we have experienced in and it's something that we've worked with the teams that will be, you know, coming on board with our company. And so feel very good about um, you know, how that can progress given our experience but obviously every situation is unique.
Steven Shemesh: Great. Thanks, guys.
Great. Thanks guys.
Becky: Thank you. Our next question, it comes from Justin Klepper from BED. Your line is now open. Please go ahead.
Thank you. Our next question comes from Justin Clever from Bed. Your line is now open. Please go ahead.
Mark Jordan: Good morning, everyone. Thanks for taking the questions. I wanted to follow up on the tech spend, just given investors have been so focused on the cost and the deleveraging the model and not as much on what the paybacks are. So nice to see the labor leverage showing up in margin. Can you remind us some of the other benefits or efficiencies you expect to realize from all these tech investments?
Good morning everyone. Thanks for taking the questions, 1 of the follow-up on on the text. Spend just giving investors have been so focused on the cost and and the deleveraging the model and not as much on what the paybacks are. So so nice to see the labor Leverage.
Showing up in margin. Um, can you remind us of some of the other benefits or efficiencies you expect to realize from from all these Tech Investments?
Kevin Willis: Yeah, I think one of the more obvious is moving a lot of information, both information that we generate internally as well as external information to cloud-based platforms so that we can make more real-time decisions around how and when we interact with our guests, both both existing and potential. And I think we've already seen some advantage come from that as well. And we would expect to see that grow into the future. And you know, I don't want to imply that there will be no tech investment going forward because there always is. And I think for us, what's going to be really critical is developing those business cases that will give us clarity and confidence in our ability to generate a strong return from those investments as as we debate and consider them internally and then ultimately execute on them.
Yeah, I think um, 1 of 1 of the 1 of the more obvious is moving, moving a lot of information, both information that that that we generate internally, as well as as external information to cloud-based platforms. So that we can make more real-time decisions around how and when we interact with with our guests, both both existing
Potential. We've already seen some advantages come from that as well, and we would expect to see that grow into the future. And, you know, I don't want to imply that there will be no tech investment going forward because there always will be.
Kevin Willis: So it's actually a pretty exciting opportunity for us going forward, both with what we've done already, as well as some of the things that we could certainly do in the future.
Lori Flees: And I'll just build on what Kevin said because I couldn't be more passionate about the opportunity that's in front of us. So when you think about the ERP and the HRIS, we talked about HRIS in terms of even some of the early wins on labor, and that there's more opportunity there. That comes from the tech investment and how we both combine the tech as well as the employee experience together in a way that drives that kind of benefit. On the ERP, we know that there's automation and more retail-centric capabilities that the company has not had before that will make us more efficient on the G&A side over time as we scale.
And I think for for us, what's going to be really critical is developing those business cases that will give us Clarity and confidence in in our ability to generate strong return from those Investments and as we debate and and consider them internally and then ultimately execute on them. So it's actually, it's actually pretty exciting opportunity for us going forward, both with what we've done, I'm ready, as well as some of the things that that we could, we could certainly do in the future.
Lori Flees: Kevin rightly pointed out that as we move things to the cloud, like we've done with our customer data, it allows our marketing team to be more sophisticated, more real-time-oriented in shifting marketing spend between different channels, which just makes our cost of customer acquisition and our lifecycle management relationship building with our customers more efficient. And then as we focus on store technology, like the replatforming of our Super Pro Tech, or even just the technology that we have in stores, that improves the ability to train our techs and get them up to speed more quickly. But it also most significantly benefits the customer experience. And when we benefit the customer experience, that that positively impacts customer retention. It impacts throughput in the store. It impacts ticket because they're able to present and OCR services better.
And I'll just fill then what Kevin said because I I couldn't be more passionate about the opportunity that's in front of us. So when you think about the Erp and the hris we talked about hris in terms of even some of the early wins on labor and that there's more opportunity there um that comes from the tech investment and how we uh, both combined the tech as well as the employee experience together in a way that drives that kind of benefit on the Erp. We know that there's Automation and more retail Centric capabilities that the company has not had before that will make us uh, more efficient on the G&A side over time as we scale, um,
Kevin Riley pointed out that as we move things to the cloud, like, we've done with our customer data. It allows our marketing team to be more sophisticated more real-time oriented, and shifting marketing spends between different channels, which just makes our, you know, cost of customer acquisition and our life cycle management relationship building with our customers more efficient.
Lori Flees: So we we see a lot of opportunity that tech will unlock, and we're in the early stages.
And then, as we focus on store technology, like the replatforming of our super pro tag, or even just the technology that we have in stores that improves the ability to train our techs and get them up to speed more quickly, um, but it also, most significantly, benefits the customer experience. So, when we benefit the customer experience, that positively impacts customer retention, it impacts throughput in the store, and it impacts ticket because they're able to present an OCR service better. So, we see a lot of opportunity that tech will unlock, and we're in the early stages.
Steven Shemesh: Thank you both for all that coverage. Super helpful. Just an unrelated follow-up, and I apologize if I missed this, but your prior guidance for the full year assumed the flattish gross margin. I'm just curious how you would have us be thinking about gross margin in 4Q. Should we expect to see a continued year-over-year margin rate expansion similar to what we saw here in fiscal 3Q? Thank you.
Thank you both, for, for all that color, super helpful, just a an unrelated, follow-up and apologize. If I missed this, but your prior guidance for the full year assumed, I think a flattish gross margin. Um, just curious how you would have us. Uh, be thinking about gross margin in 4, q. Should we expect to see uh continued year-over-year, margin rate expansion uh, similar to what we, we
Kevin Willis: Yeah, for Q4, we would currently expect margins to be at or mostly above prior years reported. Obviously, we're still early in the quarter, but based upon our forecast, that's what we expect for the quarter.
Saw here in fiscal 3Q. Thank you.
yeah, for for, for Q4 we would currently expect margins to be uh, at or mostly above prior year is reported
Uh, obviously, we're we're still early in the quarter, but Bas based upon our forecast, that's that's what we'd expect from.
Steven Shemesh: Thank you.
Thank you.
Becky: Thank you. Our next question, it comes from Thomas Wendler from Stevens. Your line is now open. Please go ahead.
Mark Jordan: Hey, good morning, everyone. Thanks for taking my question. I wanted to kick it off here with the 740 million of the Term Loan B. You know, 625 of that's kind of accounted for for the Breeze acquisition, you know, leaving 115 million remaining kind of to be deployed. How are you thinking about utilizing that?
Thank you. Our next question comes from Thomas Wendler from Stevens. Your line is not open. Please go ahead.
Hey, good morning everyone. Thanks for uh taking my question. I want to uh kick it off here with the 240 million of the term loan B. You know, 625 of that is kind of accounted for for the breeze. Acquisition, you know, leaving 115 million remaining, kind of to be deployed. How are how are you thinking about utilizing that?
Kevin Willis: The current thought process around that would be revolver paydown. We do have a draw on revolver currently. Pricing, too, is very, very similar. So by putting it in the Term Loan B, we'll just increase our optionality without really changing our cost of capital and cost of debt. So it really is, it's no more complicated than that.
Mark Jordan: Okay. No, I appreciate that. And then kind of an unrelated one for me here. You know, there's been a little bit of discussion about premiumization kind of impacting last quarter. Can you give us an idea of what the current premium mix is for the oil changes?
The current current stock process around. That would be revolver, pay down. We do have a drone revolver, currently pricing to is very, very similar. So by, by putting it into the terminal and being, uh, we'll we'll just increase our option now, only Without Really changing our our cost of capital costs to death. So it it really is, it's no more complicated than that.
Okay. No, I appreciate that. And then, uh, kind of an unrelated one for me here. You know, there's been a little bit of discussion about premiumization, uh, kind of impacting the last quarter. Can you give us an idea of what the current premium mix is for the oil changes?
Lori Flees: So I think overall, we've been hoping to say that our premium mix is around 80%. And that is a combination of both the blended synthetic MaxLife and the full synthetic. And so what we see is that there is a shift into premium from conventional, but that's drawing against the 20% of our car park, give or take. And then you have a change-up from MaxLife into full synthetic. Most of that is driven by that switch-up between MaxLife and full synthetic is when you have older cars where they were high mileage and a customer had had switched up because of the high mileage to a blend. And they switch to a new vehicle, and the vehicle OEM recommends a full synthetic. So there's still more upside. What you know, what we look at is the car park we're serving.
So I think overall we've been um open to say that our premium mix is around 80% and that is a combination of both the Blended uh synthetic next life and the full synthetic
And so, what we see is that there is a shift into premium, um, from conventional, but but that's drawing against the 20% of our car park, uh, give or take. And then you have a change up from Max life into full synthetic. Most of that is driven that switch up uh between Max lights and full. Synthetic is when you have older cars
Where they were high mileage, and a customer had switched up because of the high mileage to a blend.
Um, and they switched to a new vehicle and the vehicle OEM recommends a full synthetic. So that
Lori Flees: And the car park, you know, on the coast is higher premium than the car park in the middle of the country. So that obviously has a driving effect of where a premium mix has more upside across our network than not. But it's really car park-driven. And as a car park continues to age, people move into premium mix. And then as they switch out to newer vehicles, it switches up more dramatically.
There's still more upside. What you know what we look at is the car park we're serving.
Um and the car park, you know on the coasts is higher premium than the car park in the middle of the country. So that obviously has has a has a driving effect of where premium mix has more upside across our Network than that but it's really car park driven and as a car park continues to age people move in to premium mix and as as they switch out to newer Vehicles it switches up more more dramatically.
Mark Jordan: Perfect. I appreciate the color. Thank you.
Lori Flees: Thank you.
Perfect. I appreciate the color. Thank you.
Becky: Thank you. Our next question, it comes from David Luntz from Wells Fargo. Your line is now open. Please go ahead.
Thank you.
From Wells, Fargo, your line is now open. Please go ahead.
Mark Jordan: Hey, good morning, guys. Thanks for taking my questions. Any early indications on how we should think about franchise unit growth in 26? Just trying to get a bit more color on thinking through the ramp to 150 per year by 27.
Hey, good morning guys, thanks for taking my questions. Any early indications on how we should think about franchise unit growth in 26. Just trying to get a bit more color on on thinking through the ramp to 150 per year by 27.
Lori Flees: Yeah, we can continue to accelerate the pipeline, which is the most important. And there's still a lot of opportunity to grow stores, given how fragmented the market is and the fact that our stores only reach about 35% of the population. With the refranchising effort, we talked about the fact that those new franchisees or new owners of territory, they'll take some time to build up the pipeline. So we knew that the current franchisees would contribute about two-thirds of the 150 new units per year. Then that continues to grow and pace nicely, and that the new franchisees would then contribute the rest, and that would be pretty back-end loaded in the ramp. And that definitely is proving to be true, but so you'll continue to see us moving towards that 150 target overall.
Yeah, we, uh, we continue to
like line, which is the most important and, um,
There's still a lot of opportunity to grow Stores um given how fragmented the market is. And the fact that our store is only reach about 35% of the population.
Um, with the reef franchising effort. We talked about the fact that those new franchises for new owners of territories. Um, they'll take some time to build up the pipeline, so we knew that that the current franchisees would contribute about 2/3 of the 150, uh, of the 150 new units per year, um, and that continues to grow and Pace nicely. And that the new franchisees would then contribute the rest. And that would be pretty back-end loaded, um, in the Rams and that definitely is proving, uh, to be true. But
Lori Flees: But I think we still feel very good around the development agreements that have been signed with our franchisees and the pace with which they're building the pipeline to deliver on those.
Um, so you'll, you'll continue to see us moving towards that 150 Target. Um, overall, but I, I think we still feel very good around the development agreements that have been signed with our franchisees and the pace with which they're building the pipeline to deliver on those.
Mark Jordan: Got it. That's helpful. And then just one more. Any update on fleet performance and how that looks today and if it's still outperforming the company average?
Got it, that's helpful. And then just one more, any update on fleet performance? And you know how that looks today and if it's still outperforming the company average.
Lori Flees: Yeah, the investments that we're making on fleet continue to pay off as growth and our fleet customer base continues to outpace the consumer transactional and ticket growth. The partner, you know, our partnerships with the franchisees have grown this year. So we put a big effort on this for company markets, obviously working with national fleet companies, but also many fleet management or fleet owners are regional or even local in nature. And so as we expand our partnership with franchisees, it allows us to drive growth in that area. But it continues to be a very strong contributor to our overall markets.
Yeah, the Investments.
Growth.
Partner, you know, we our Partnerships with the franchises has grown this year. So we put a big effort on this for company markets, obviously, working with national Fleet companies, but also many Fleet Management, uh, or Fleet owners our regional or even local in nature. And so, as we expand our partnership with franchises, that allows us to drive growth in that area.
Um, but it it continues to be a very strong contributor to our overall working.
Mark Jordan: Thank you.
Thank you.
Becky: Thank you. This marks the end of today's Q&A session and therefore concludes today's call. Thank you for joining us today. You may now disconnect your lines.
Thank you. This marks the end of today's Q&A session and therefore concludes today's call.
Thank you for joining us today. You may now disconnect your lines.