MNRO - NASDAQ

Good morning, ladies and gentlemen, and welcome to Monro, Inc.'s Earnings Conference Call for the First Quarter of Fiscal 2026. [Operator Instructions] As a reminder, this conference call is being recorded and may be reproduced in a whole or in part without permission from the company. I would now like to introduce Felix Veksler, Vice President of Investor Relations at Monro. Please go ahead, Felix.

Thank you. Hello, everyone, and thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we will be referencing a presentation that is available on the Investors section of our website at corporate.monro.com/investors. If I could draw your attention to the safe harbor statement on Slide 2, I'd like to remind participants that our presentation includes some forward-looking statements about Monro's future performance. Actual results may differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Monro's filings with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, on today's call, management's statements include a discussion of certain non-GAAP financial measures, which are intended to supplement and not be substitutes for comparable GAAP measures. Reconciliations of such supplemental information to the comparable GAAP measures will be included as part of today's presentation and in our earnings release. With that, I'd like to turn the call over to Monro's President and Chief Executive Officer, Peter Fitzsimmons.

Thank you, Felix, and thanks to everyone for joining us. Great to be here with you today. This morning, I'd like to update you on the progress we've made in the 4 key areas identified as opportunities for performance improvement during our initial assessment of the business, as shown on Slide 3 of our presentation materials. As a reminder, these include closing unprofitable stores; increasing merchandising productivity, which includes mitigating tariff risk; driving profitable customer acquisition and activation; and improving our store location-based customer experience and selling effectiveness. After that, I'll briefly touch upon our fiscal first quarter results, which serve as a solid foundation to build upon as we implement our performance improvement plan to enhance Monro's operations, drive profitability and increase operating income and total shareholder returns. Let's start with closing unprofitable stores. During the first quarter, we successfully completed the closing of 145 underperforming stores, which included repositioning our inventory. To summarize quickly, we announced the closings on our May 28 earnings call. All of the stores were dark by the end of May. We then completed the removal of the vast majority of our inventory and IT equipment from these locations by the end of June. As a reminder, the closure of these stores will have limited impact on our total sales, but is expected to deliver meaningful improvement to our profitability. The 145 stores generated approximately 5% of our total sales in fiscal 2025, and we are likely to recapture some of the sales in other Monro locations near the closed stores. We've now started a process to exit the real estate at these locations, which includes 40 owned stores. This process is expected to generate positive cash flow and be largely completed over the next 12 months. Importantly, and as discussed previously, this enables us to focus on improving performance in our 1,115 continuing locations for the remainder of fiscal 2026. Now turning to performance improvement. Let's first address merchandising, including mitigating tariff risk. In early June, we were very pleased to announce that Katy Chang joined Monro as our Senior Vice President of Merchandising and will lead the merchandising team. Katy has significant experience in both the automotive aftermarket and retail, having previously served in senior roles at American Tire Distributors and the home improvement retailer, Lowe's. With just 2 months under her belt, Katy is already making a significant impact. Together with others on the Monro team, Katy has spent time with all of our largest vendors and tire distributors. We've had constructive discussions during which we have addressed a wide range of priorities for both Monro and our valued suppliers, including product availability, resetting our assortment, product training in the stores, price and go-forward marketing support. We will continue our dialogue during the remainder of the summer and expect to be well positioned with the right product to meet our customers' needs in the current fiscal year and beyond. As it relates to tariffs, our team continues to conduct fact-based negotiations with top suppliers to mitigate as much of the tariffs, actual and anticipated, as possible. We've experienced some materials cost based and tariff-related increases. However, the impact on our first quarter was not as significant as originally anticipated. As it relates to tires, some cost increases to Monro were offset with minimum advertised pricing adjustments to our customers, which mitigated the impact on our gross margin rate. Given continued uncertainty around where tariff increases will shake out, we will closely monitor and manage the impact on us and on our customers. Now let's turn to driving customer acquisition and activation. As previously discussed during our May earnings call, we've identified Monro's highest value customers. As a reminder, these customers deliver significantly more profit per customer than our lowest tier of customers. They are repeat customers that visit us over a number of years, and they choose us because we provide both the tires they want and the auto aftermarket services that meet their vehicle needs. During the first quarter, we advanced our targeting efforts through marketing tests that have been conducted at a significant number of store locations. We have deployed a wide range of digital tools to reach our target audience, but we've also selectively reinvigorated local media such as radio and direct mail. We are now implementing our refined targeting in a representative sample across several hundred stores in our chain. The full impact of a more systematic approach to traffic generation won't be felt until later this fiscal year. But when assessing markets where our approach has already been implemented, the early results are encouraging. The precision with which we are deploying this targeting may also enable us to leverage our learnings in the development of future marketing programs to reach different customers and in different markets. Finally, let's address things we are doing to improve the customer experience and selling effectiveness in our stores. Many of you have heard us talk a lot about the ConfiDrive Digital Courtesy inspection process. It's a tremendous tool that allows us to improve communications and educational selling to build trust as well as further solidify relationships with our customers. The progress we continue to make with ConfiDrive can clearly be seen in our first quarter results as evidenced by the sales and unit growth that we drove in our tire category and our high margin service categories, including front-end shocks, brakes, batteries and maintenance services. While we've made progress, we have opportunities to be more effective with this tool going forward. Another area in which we are systematically enhancing the customer experience is through better preparation for our customers before they even arrive at our stores. When guests schedule appointments by calling our stores, our call center or through our online appointment system, we have opportunities to communicate with them in a variety of ways, including phone, text messages and e-mails so that we can fully understand and confirm their tire and vehicle service needs prior to their store visit. We believe that consistent use of these tools will lead to a better customer experience. To accelerate the implementation of an enhanced guest experience, we've established a task force aimed at piloting potential improvements, including hands-on coaching and training in a range of locations across our store network. Now, let me briefly touch upon several key highlights of our fiscal first quarter results, which Brian will cover in more specific detail in just a few moments. Turning to Slide 4 of our presentation materials. The Monro team drove mid-single-digit comparable store sales growth in the quarter, which has enabled us to report 2 consecutive quarters of positive comps for the first time in a couple of years. We maintain prudent operating cost control as reflected in lower store direct costs in the quarter. We reduced inventory levels across the system by approximately $10 million, primarily as a result of reducing our store count, and our profitability on an adjusted diluted earnings per share basis was in line with our prior year first quarter. Further and encouragingly, our preliminary fiscal July comp store sales are up 2%, which would result in our sixth consecutive month of consistent comp store sales growth. To summarize, we're pleased with the progress we've made implementing the 4 key areas of focus identified during our initial assessment of the business, which we believe will allow us to accelerate the pace of the company's performance improvement as well as better capitalize on positive industry trends to unlock Monro's full potential. Our fiscal first quarter results serve as a solid foundation that we believe we can build upon to drive enhanced profitability and increased operating income and total shareholder returns in fiscal 2026. Before I hand the call over to Brian, I'd like to thank our teammates for their dedication to achieving our business objectives as well as their commitment to our customers. And with that, I'll now turn it over to Brian, who will provide an overview of Monro's first quarter performance, strong financial position and some additional color regarding the remainder of fiscal 2026. Brian?

Thank you, Peter, and good morning, everyone. Turning to Slide 5. Sales increased 2.7% to $301 million in the first quarter. This was primarily driven by a 5.7% increase in comparable store sales, which was partially offset by a reduction in sales due to closed stores. For reference, comps were up 7% in April, up 6% in May, and we exited the quarter up 4% in June. Tire units were up 3% in the first quarter. We also gained higher market share in our higher-margin tiers in the quarter. Gross margin decreased 170 basis points compared to the prior year. This primarily resulted from higher technician labor costs, mostly due to wage inflation; and higher material costs, largely due to mix within tires from a value-oriented consumer that traded down more of their tire purchases to our Tier 3 offerings as well as an increased level of self-funded promotions. These were partially offset by lower occupancy costs as a percentage of sales. Total operating expenses were $113 million or 37.5% of sales as compared to $95.9 million or 32.7% of sales in the prior year period. Importantly, the increase was principally due to $14.8 million of store closing costs related to the closure of 145 underperforming stores and $4.7 million of costs incurred in connection with third-party consultants related to our operational improvement plan. Operating loss for the first quarter was $6.1 million or negative 2% of sales, was negatively impacted by the store closing and third- party consulting costs just discussed. This is compared to operating income of $13.2 million or 4.5% of sales in the prior year period. Adjusted operating income, a non-GAAP measure, for the first quarter was $14 million or 4.7% of sales as compared to $14.7 million or 5% of sales in the prior year period. Net interest expense decreased to $4.8 million as compared to $5.1 million in the same period last year. This was principally due to a decrease in weighted average debt. Income tax benefit was $2.7 million or an effective tax rate of 24.8%, which is compared to income tax expense of $2.3 million or an effective tax rate of 28.5% in the prior year period. The year-over-year difference in effective tax rate is primarily related to the discrete tax impact related to share-based awards and other adjustments, none of which are significant. Net loss was $8.1 million as compared to net income of $5.9 million in the same period last year. Diluted loss per share was $0.28. This is compared to diluted earnings per share of $0.19 for the same period last year. Adjusted diluted earnings per share, a non- GAAP measure, was $0.22. This is compared to adjusted diluted earnings per share of $0.22 in the first quarter of fiscal 2025. Please refer to our reconciliation of adjusted operating income, adjusted net income and adjusted diluted EPS in this morning's earnings press release and on Slides 9, 10 and 11, in the appendix to our earnings presentation for further details regarding excluded items in the first quarter of both fiscal years. As highlighted on Slide 6, we continue to maintain a strong financial position. At the end of the first quarter, we had net bank debt of $64 million, availability under our credit facility of approximately $398 million and cash and equivalents of approximately $8 million. Our AP to inventory ratio was 175% at the end of the first quarter versus 177% at the end of fiscal 2025. Our cash from operations was slightly negative in the quarter, primarily due to timing of vendor payments. We received $3 million in divestiture proceeds, invested $7 million in capital expenditures, spent $10 million in principal payments for financing leases, and distributed $9 million in dividends. Now turning to our expectations for the full year of fiscal 2026 on Slide 7. Given the uncertainty surrounding a fluid tariff situation and macro environment, we are not providing guidance for fiscal 2026 at this time. However, we are providing the following assumptions to assist in your modeling. We continue to expect to deliver year-over-year comparable store sales growth in fiscal 2026, primarily driven by our improvement plan as well as any tariff-related price adjustments to our customers. We continue to expect that the results of our store optimization plan will reduce total sales by approximately $45 million in fiscal 2026. Given expected baseline cost inflation as well as our exposure to tariff-related cost increases, we expect that our gross margin for the full year of fiscal 2026 will continue to remain pressured. We continue to expect to partially offset some of this baseline cost inflation as well as some of the tariff-related cost increases with benefits from our store closures and operational improvements from our improvement plan. We believe this will allow us to deliver year-over-year improvement in our adjusted diluted earnings per share in fiscal 2026. We continue to expect to generate sufficient operating cash flow that will allow us to maintain a strong financial position and to fund all of our capital allocation priorities, including our dividend during fiscal 2026. Regarding our capital expenditures, we continue to expect to spend $25 million to $35 million. And with that, I will now turn the call back over to Peter for some closing remarks.

Thanks, Brian. As previously indicated, we believe our business model is durable with Monro able to provide an important service to our customers in any economic environment. Our balance sheet and cash flow profile remains strong. We are encouraged by the recent positive momentum and expect that the 3 remaining pillars of our plan will improve operations, drive incremental profitability and enhance total shareholder returns this fiscal year. With that, I will now turn it over to the operator for questions.

[Operator Instructions] The first question is from the line of Thomas Wendler with Stephens.

Congratulations on the strong quarter. Just wanted to dig into SG&A here. Once you pull out some of the onetime items, there's some really nice improvement year-over-year. Can you give me a little color on how much that improvement was from closing the unprofitable stores? And then how should we be thinking about kind of SG&A as a percent of revenue moving forward?

Yes, that's a great question. We had great cost control in the quarter. The team did a good job of managing store direct costs as well as our corporate costs. Some of that benefit was related to the closed stores. But as a reminder, we only had that benefit for 1 month in June, but we saw better SG&A as a percent of sales in April and May as well prior to the closures. As we think about the balance of the year, we're still looking at flattish G&A for the remaining quarters compared to the prior year.

Perfect. And then maybe just one more from me. Just touching on the same-store sales, 2% in July. How should we be thinking about same-store sales for the back half of the year?

So I think we feel pretty good about 6 consecutive months of positive comps. And remember, in the first -- or in the last quarter of the prior fiscal year, our comps were up 2.8%. So 2.8% and then 5.7%, we think, establishes us in achieving what we proposed, which is to steadily increase our comp store sales year-over-year. It doesn't mean it's going to be consistent, but steadily over the quarters, I think we're looking at positive comp store sales. So we would suggest people look less at the monthly and more at the trend, which has been pretty positive.

The next question is from the line of David Lantz with Wells Fargo.

I was just curious if you could dive into gross margin in a little more detail. So obviously declined 170 basis points year-over-year. But I was curious if you could give us more commentary on the trajectory of the year as well as how much higher technician labor costs and material costs were in the quarter and what the B&O leverage looked like?

Absolutely. Thanks for the question. So as you look at the components of the 170 basis point decline in gross margin year-over-year, and just as a reminder, that Q1 gross margin in the prior year is our hardest comp of the year in terms of gross margin percentage. But that decline of 170 basis points was driven by 170 basis points higher technician labor costs as a percent of sales, primarily driven by wage inflation year-over-year. There was about 120 basis points of material cost, is higher as a percentage of sales, really driven by the continued trade down into Tier 3 in the tire category as well as the effect of higher self-funded promotions year-over-year. And then finally, we saw a 120 basis point benefit of leverage on occupancy costs related to the higher comps, but also we had some benefit of the store closures for 1 month of the quarter. As it relates to the go-forward, I think that we'll see some of the technician labor cost pressure to dissipate as the comps in that category get a little bit easier as the year goes on. Same thing with the material costs. From a year-over-year perspective, the promotional activity and the trade down, we'll start to lap that. We really didn't experience that too much in Q1 of last year, but we'll experience and lap prior year trade down and prior year promotions. And then obviously, if we continue to deliver increased comparable store sales and see the continued benefit from the store closures, we'd expect to continue to leverage on D&O. So all in, I would say that we expect our gross margin compared to the prior year to narrow and then ultimately to meet as we get to the latter part of the second half.

Got it. That's helpful. And then on the Q1 comps, can you just talk about traffic and ticket in a little more detail and also what that looks like on a quarter-to-date basis?

Traffic has been pretty steady, but we have seen an increase in ticket, which we're pretty happy about. And we're optimistic that some of the things that we're putting into place to drive incremental traffic will take hold as the year progresses. And with some luck, we'll continue to see strong ARO.

The next question is from the line of Bret Jordan with Jefferies.

Brian, traffic -- you said traffic was steady. Is that up? Was traffic and ticket, both up in the quarter?

Traffic was flat in the quarter, up some months, flat in others, and ticket was steadily up throughout the quarter.

Okay. And then I think you called out a 120 basis point benefit from occupancy leverage and closures. What was the net impact of closing the stores in the quarter to -- on the margin? I guess you had the benefit of lower SG&A and the benefit of occupancy level or lower occupancy. What did the store closures contribute in the quarter?

Yes. Without getting into specifics, I would tell you that it was a smaller piece of the benefit in those lines in the quarter, given the fact that we only had 1 month of those stores being closed. We expect it to be more meaningful, but it wasn't the bigger driver of the quarter for Q1.

I would add that -- I was just going to say, Bret, I would add that when you look at the impact of a full quarter's worth of gross margin, the gross margin in the stores that we closed was definitely lower than the continuing stores. So that should help us as we go forward also.

Okay. And then, I guess, how should we think about second quarter costs on the closures? And you said 40 properties were owned that you're going to divest? Were those mortgaged? Or is that a real chunk of cash flow going to come out of that?

Yes, there's no mortgage there. All of our business is financed strictly through the revolver as well as the finance leases on our books. So we said that we thought that we would be able to generate positive cash flow related to the real estate activities that we have ahead of us, and we expect those to primarily be done over the year. So we expect it to be a source of cash from here forward related to the store closures.

And I would add that one of the very good things about the closures is they're done. We announced at the end of May that we were going to close the stores. They were closed by the end of May. We moved all the inventory by the end of June, and there aren't going to be any incremental costs from store closures going forward. So as we said in our prepared remarks, it enables us to completely focus on those things that can drive improved performance in the continuing stores.

The next question is from the line of Brian Nagel with Oppenheimer.

Nice quarter. Question I want to ask -- I mean, it's a bit repetitive, so I apologize. But just you look at the sales trajectory. So clearly, I mean, when you're talking about, we've now had this nice period of positive comps, but above the positive, there's some volatility. Just look at what went from Q4 to Q1 and then modest moderation here, at least early into the fiscal second quarter. So is there something -- is there a way to explain that? I mean recognizing your business tends to lead to short-term volatility. But is there some way to explain kind of why we're seeing this trajectory in comps?

Well, I would say that, as Brian has commented previously, the comps in the prior year were easier for us to perform well against than they are on a go-forward basis. But I think it's also important to focus on the work streams that we think will drive incremental profit, and they are driving traffic steadily through improving the way we go to market and reach our customers using the digital tools that we put into place. This isn't something that happens in weeks. But over the course of the rest of the year, we're going to see, I think, some incremental traffic from that. We're seeing a little bit of it in the last few weeks by focusing on those customers that are repeat customers and do buy more product for us -- product and services. And then the second thing that I think encourages us about increased sales on a go-forward basis was -- is the use of the tools that we have in the stores, mainly ConfiDrive. So what ConfiDrive enables us to do when we do it well is inspect the vehicle and tell the customer what things the customer, he or she, ought to be thinking about in order to keep their cars safe. We suggested to you that in the first quarter, we saw some really positive signs out of that. For example, we had a 26% increase in front-end shocks. That's all coming from what we learned in the ConfiDrive process. So the combination on a go-forward basis of the marketing effort and the ability to use ConfiDrive to drive incremental sales, both in the moment when the car is on the rack, and over time, when we retarget the customer after we learn what they might need, I think, will contribute to better sales performance in the latter part of the year.

That's very, very helpful. And then my second -- my follow-up question, just on gross margin. Given -- it seems like as the business is evolving here, there's different puts and takes. But how should we think about what we're sort of say, playing for in gross margin, both near and longer term? What levels should we be looking at to suggest that Monro is back to a healthy state there?

Well, I think that, first of all -- again, the decrease in Q1 is against our toughest compare of the year. We made comments in the outlook saying that we thought gross margin was going to remain pressured for FY '26. I would kind of dimensionalize that as no better than prior year gross margins in FY '26. And the components of that are some of the things that I talked about in a previous question related to lapping some more like-for-like compares on the promotional environment, the trade down environment and the labor environment, but also knowing that we have baseline cost inflation and tariff costs building in and we're very conscious of the impact that could have on us and on our consumer. So that's the kind of look for FY '26. As we think about longer term, we think this business can continue to expand margins on a growing sales number, and that's really driven by leverage and occupancy costs as well as being able to use the merchandising programs that we have in place with Katy's onboarding to find material margins and variable margins as well.

There are no further questions waiting at this time. I would now like to pass the call back over to our CEO for any closing remarks.

Well, thank you again to everyone for joining us today. I'm optimistic about the opportunities in front of us, and I really do believe that Monro is well positioned to capitalize on positive industry trends as we focus on driving profitable growth this year. We still have further room for progress as we continue to implement our performance improvement plan, and we have a lot of work to do. But we've got a good foundation to create long-term value for all of our stakeholders. We look forward to keeping you updated on our progress in the quarters to come. Have a great day. Thanks again.