Release Date: May 23, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Monro Inc (MNRO, Financial) has significant scale with approximately 1,300 stores in 32 states, providing competitive advantages over smaller players.
- The fundamentals of the auto aftermarket industry remain strong, with over 280 million vehicles in operation and increasing vehicle complexity driving a shift to professional services.
- Monro Inc (MNRO) has implemented four initiatives to offset weakness in the tire market, including digital inspections and various promotions.
- Gross margin increased by 210 basis points compared to the prior year, driven by lower technician labor costs and material costs.
- The company maintains a solid financial position with $125 million generated from operations and a net bank debt to EBITDA ratio of 0.7 times.
Negative Points
- Sales decreased by 0.2% year over year to $310.1 million in the fourth quarter, with comparable store sales decreasing by 7.2% when adjusted for the extra week.
- Tire units in the quarter were down 11%, contributing to pressured store traffic and lower overall average selling prices.
- The oversupply of lower-margin tires in the US and milder weather have contributed to a prolonged tire deferral cycle.
- Operating expenses increased to $99.7 million or 32.2% of sales, up from $97.6 million or 31.4% of sales in the prior year period.
- Preliminary comp store sales are down approximately 12% in the first quarter of fiscal 2025 to date, indicating continued top-line challenges.
Q & A Highlights
Q: Tires have been under pressure for several quarters now. Can you parse out the drivers of the weaker comps in March, April, and May to date in more detail? Have you seen a change in deferrals or trading down relative to a few months ago?
A: David, good morning, this is Mike. It is primarily a tire story, which has accelerated or decelerated coming out of February. Other service categories, such as brakes, follow the trends of tires due to their high attachment rate. Our initiatives remain focused, and we are priced right and driving value for customers.
Q: You're accelerating your OPP tire. Can you help us think through the dynamics with regards to gross margins? Do you have any visibility into when the oversupply of these tires could be worked through?
A: Unfortunately, we don't have a crystal ball on the oversupply of tires. We are focused on meeting customer demand for value while maintaining our emphasis on Tier 1, 2, and 3 tires. Our tire mix and units haven't changed significantly, and we haven't lost market share. We aim to get more customers through the door and return to positive unit growth.
Q: You noted breakeven EPS for Q1 if top line trends continue. Can you help parse out some SG&A and gross margin bucket expectations?
A: We've done a good job of increasing variable margins and controlling costs. For Q1, we expect flattish SG&A and fixed costs, consistent tax rate, and interest. The breakeven and sensitivity to comps reflect the flow-through of the top line.
Q: There was a significant increase in franchise royalty revenue in last quarter's 10-Q. Was there anything notable to call out there? What should we expect for a normal run rate moving forward?
A: The increase was related to the timing of royalty recognition from one of our franchisees. We don't expect any meaningful change in our historical run rate going forward.
Q: Were there any notable regional callouts regarding weather impact?
A: Our sales performance showed weakness led by the South, while the Northeast and West performed better, and the Midwest was in line.
Q: How do you assess the return on initiatives to offset tire market weakness? How should they impact the P&L, and how long should they be in place?
A: We are focused on growing top line sales to drive profitability and cash flow. We rely on vendor partners for support and drive productivity in our shops. Our initiatives are aimed at gaining market share and returning to positive unit growth in tires, which will improve service categories.
Q: Can you discuss market share across other tiers and expectations for near-term changes with new initiatives?
A: We are focused on not giving up market share and growing units. We have flexibility to be competitive and take advantage of promotional dollars to support margins and value for consumers. We expect Tier 1, 2, and 3 to recover and maintain healthy participation in Tier 4.
Q: What are your expectations for the first quarter and full year of fiscal 2025?
A: Preliminary comp store sales are down approximately 12% in Q1 to date. If trends continue, we expect breakeven adjusted diluted EPS for Q1. Fiscal 2025 earnings will depend on comp store sales, with every 1% change representing about a $0.14 impact on adjusted diluted EPS. We expect to generate at least $100 million of operating cash flow and maintain our dividend.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
