Monro, Inc.
Q4 2022 Earnings Call Transcript

Published: 19 May 2022

[Operator:]

Good morning ladies and gentlemen and welcome to Monro Inc. earnings conference call for the fourth quarter and full year fiscal 2022. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the call, please press star followed by the number zero on your touchtone phone. As a reminder, this conference call is being recorded and may not be reproduced in whole or in part without permission from the company. I would now like to introduce Felix Veksler, Senior Director of Investor Relations at Monro. Please go ahead.

[Felix Veksler:]

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/investorresources. 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, and include the significant uncertainty related to the duration and scope of the COVID-19 pandemic and its impact on our customers, executive officers and employees. 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, Michael Broderick.

[Michael Broderick:]

Thank you Felix and good morning everyone. I’d like to start off this morning by thanking all of our teammates and customers for their contributions to the growth and prosperity of our company and our shareholders for their continued support. We had a tough fourth quarter, principally January, but we have begun to see the initiatives we have put in place take hold and produce results. This morning, I’d like to cover four areas

[Brian D’Ambrosia:]

Thank you Mike and good morning everyone. Turning to Slide 9, sales increased 7.4% year-over-year to $328 million in the fourth quarter. Same store sales increased 1.4% while sales from new stores increased $19 million. Gross margin decreased 320 basis points from the prior year to 31.9%. The year-over-year decrease was primarily due to an incremental investment in technician headcount and wages to support current and future top line growth. We estimate that this incremental investment impacted gross margin by 250 basis points in the quarter. Lower than expected comparable store sales growth also resulted in higher fixed distribution and occupancy costs as a percentage of sales. Material costs as a percentage of sales were flat as the inflationary impacts of higher material costs were offset by higher selling prices and a mix shift towards our higher margin service categories. Total operating expenses were $93.2 million or 28.4% of sales as compared to $86.4 million or 28.3% of sales in the prior year period. The increase was principally due to having 41 new stores as well as due diligence and integration costs related to acquisitions completed and evaluated in fiscal 2022. Operating income for the fourth quarter declined to $11.5 million or 3.5% of sales, primarily driven by lower year-over-year gross margin. This is compared to $20.7 million or 6.8% of sales in the prior year period. Net interest expense decreased to $5.7 million as compared to $6.7 million in the same period last year. This was principally due to a decrease in weighted average debt. Income tax benefit was a net benefit of $2.4 million, which included a $3.1 million tax benefit due to differences in statutory tax rates from loss years in which net operating losses have been carried back. This compares to $2.3 million of tax expense in the prior year period. Net income was $8.6 million as compared to $11.8 million in the same period last year. Diluted earnings per share was $0.25 compared to $0.35 for the same period last year. Adjusted diluted earnings per share, a non-GAAP measure, was $0.20 in the quarter and excluded approximately $0.04 per share of costs related to store impairment charges and acquisition, due diligence and integration costs, and $0.09 of income tax benefit related to net operating loss carry-backs. This compares to adjusted diluted earnings per share of $0.38 for the same period last year, which excluded $0.03 per share of costs related to our Monro.Forward initiatives, management transition costs, and a distribution center closure. As highlighted on Slide 10, we continue to maintain a very solid financial position. We generated $174 million of cash from operations during fiscal 2022. We invested $28 million in capital expenditures, paid $83 million for acquisitions, and spent $39 million in principal payments for financing leases. Lastly, we distributed $35 million in dividends. At the end of the fourth quarter, we had bank debt of $176 million, cash and cash equivalents of $8 million, and a net bank debt to EBITDA ratio of 0.9 times. While we are not providing guidance for fiscal 2023, we are providing color to assist in your modeling. Note that our fiscal 2023 comments exclude the P&L impacts from the divestiture of the wholesale and tire distribution assets. While we are still working to finalize the one-time gain or loss on the divestiture, we expect the ongoing impact to be accretive to overall gross and operating margins and neutral to earnings per share. As we make investments in store labor to drive higher year-over-year sales, this will continue to put pressure on our gross margins in fiscal 2023, which should be offset by a higher percentage of service sales, pricing actions, and lower distribution and occupancy costs as a percentage of sales as we leverage higher sales against largely fixed costs. Total operating expenses are expected to be slightly lower as a percentage of sales on a year-over-year basis. Regarding our capital expenditures, we expect to spend approximately $40 million to $50 million in fiscal 2023. With that, I will now turn the call back over to Mike for some closing remarks.

[Michael Broderick:]

Thanks Brian. We’re encouraged by the momentum in our business and optimistic about our outlook for fiscal 2023 and beyond. Overall, we believe we remain well positioned to capitalize on strong demand while having the financial flexibility to execute our growth strategy and deliver long term value creation for our shareholders. With that, I’ll now turn it over to the Operator for questions.

[Operator:]

Our first question today comes from Jonathan Lamers of BMO Capital Markets. Jonathan, over to you.

[Jonathan Lamers:]

Good morning.

[Michael Broderick:]

Good morning.

[Jonathan Lamers:]

I’m not sure how much color you want to give here, but for those 300 underperforming stores, could you tell us how far the gross margins are below average and maybe how much the margins improved as the comp sales swung from negative 8% to positive 8%?

[Michael Broderick:]

Jonathan, that is a big initiative on behalf of Monro. I’ve talked about it in the past that every retailer has the bottom 300 stores. I would say most of my prepared remarks were centered around the fact that we are--we really do have sales under control and when we marry demand and supply, and the demand is our customers and supply is our teammates. I can tell you from a gross profit perspective, there’s not--they’re very similar to most of our stores, so it’s really all about marrying capacity and productivity and we just need to get the sales line up to a level where they’re able to drive to the bottom line, those sales can fall to the bottom line.

[Jonathan Lamers:]

Okay, and how much further does the technician headcount need to increase by year end fiscal 2022, and do you have any update on the progress into fiscal Q1?

[Michael Broderick:]

We continue to really optimize and really kind of work on re-assorting our labor across all our stores. I think that’s a big opportunity for us to continue going forward, but we are in the later innings of how many additional headcount. I mean, we’ve made a significant investment in ’22 to really put us in ’23 in a situation where we can take care of the demand in the marketplace, but right now it’s really focused on those small stores as well as opportunistically filling in, in other stores where we have a significant amount of demand, just keeping up with the demand.

[Jonathan Lamers:]

Okay, one detail question before I turn it over. What were the trailing sales for the tire distribution assets that were sold, and Brian, did you say that the sale will be accretive to gross margin?

[Brian D’Ambrosia:]

Yes Jonathan, I’ll take the second part first. They will be accretive to gross and operating margins and neutral on an earnings per share basis, and those assets generate about $115 million in sales for trailing 12.

[Jonathan Lamers:]

Okay, thanks. I’ll pass the line.

[Michael Broderick:]

Thank you.

[Operator:]

Thank you Jonathan. Our next question today comes from Brett Jordan of Jefferies. Brett, over to you.

[Brett Jordan:]

Hey, good morning guys.

[Michael Broderick:]

Hey Brett.

[Brett Jordan:]

On the divestiture of the distribution business, is there--I guess from the physical infrastructure standpoint, like the Monro Rochester DC was sort of--I think sort of almost attached to some of the corporate infrastructure. Do you have to do much physical carve-out here or do they sort of operate within your infrastructure? I guess the second follow-up on that is all parts sourcing going to be external now since your ability to direct import parts and put them on the tire truck might be challenged?

[Michael Broderick:]

Yes, let me address that. More details to come exactly how the DCs are laying out, but where we’re going as an organization very much is reliant on our third party partners. I have talked about in the past that I’m relying on my third party partners on the parts and now on the tire side, ATD, to manage availability, quality and price. When I look at this business I’ve been in for 30 years, Brett, it’s all about relationships and it’s all about using partners to make us a better organization. We’re going to be focused on our retail customer, our commercial customer, and also focusing on our teammates - that’s our focus. Now specifically around parts, we’re going to be extremely loyal to our parts providers going forward. We’re not going to just source the top 50 movers and expect our retail or our preferred partners to source the slow moving items for us. We’re going to look across the board and we’re going to rely on them to be able to provide us the products. I believe that’s going to give us a better price in the marketplace, we’re going to be more significant to our third party partners going forward. The same thing goes for tires. We’re going to improve our service to our stores. We’re going to get every day service which we’re not getting right now from our distribution centers. Remember, most of those warehouses were centered in North Carolina and Kentucky, so they didn’t reach all of our stores. Now we’re going to have everyday delivery from ATD, which is best in class, and I’m really looking forward to bringing new assortments to our stores so that we can be more relevant on both the tires and then continue to evolve our parts distribution, using our third party providers.

[Brett Jordan:]

Okay, great. Then a question on the tire pricing model, I think you said tires were down one on the comp. Could you talk about what was units versus price in the Q4 comp on tire, and maybe I guess if you have it, the units as a comparable to pre-COVID, like Q4 of fiscal ’20--well, I guess it would be fiscal ’19, just sort of feel where we are in volumes versus a pre-pandemic environment.

[Brian D’Ambrosia:]

Yes, it’s Brian, I’ll take that. I would say that like all parts of our business in the quarter, ticket was the leading factor in the comp performance, and I would say relative to the unit performance that what we saw was that we were in line with industry trends for our retail business throughout the quarter, so our ability to continue to hold units while driving ticket and certainly continuing to see variable gross profit per tire increase as well in the quarter, we think that the tire category has been really strong for us and it happened again in Q4.

[Brett Jordan:]

Okay, great, and then my last housekeeping, the monthly comps, I think you’ve given us January and April, or one or two of the months. Could you give us the monthly for the quarter?

[Brian D’Ambrosia:]

Yes, it was up about 1 in January, up 5 in February, and down about 2 in March.

[Brett Jordan:]

Okay, great. Thank you.

[Operator:]

Thank you Brett. Our next question comes from Brian Nagel of Oppenheimer & Co. Brian, please go ahead.

[William Dawson:]

This is William Dawson on for Brian Nagel. Thanks for taking our question.

[Michael Broderick:]

Hi William.

[Brian D’Ambrosia:]

Good morning.

[William Dawson:]

Our first question was with regard to gross margin. There was some expectation for more improvement as the sales mix in services recovered. Could you say at what point in the quarter the decision was made to lean into incremental investments in technicians and how we should think about the magnitude of the impact to gross margins in Q4 for the quarters of fiscal 2023 and in March?

[Michael Broderick:]

All right, William, this is Mike. Good morning. Just to be clear, on gross profit there’s three components of gross profit for us

[William Dawson:]

Thank you, that’s very helpful. Our next question was with regard to top line. In fiscal April, comps were down 3% year-over-year versus a record last year, and here in May trending up 3%, so was this weather related or is there other factors in play with your consumer that’s responsible for the recent improvement, and also recognizing that you’re not giving guidance for the balance of fiscal ’23, but how should we think about the puts and takes with regards to sales over the next couple of weeks or months?

[Michael Broderick:]

I’m going to go back to January, just to be very clear. January was--although we were positive, it was significantly below our internal expectations, and we were pretty consistent across at least the prior two quarters of having mid-teens type of growth that we were getting used to, so things really changed. Coming out of January, even the first couple of weeks in February, remember a week or two in February we had soft sales, then it immediately changed as our customers and our teammates got healthier, so we really saw a lot of improvement coming out of COVID. Then when you look at the March performance, we were--it’s all productivity, so when we were adding capacity and managing capacity, now the next step is how do we drive productivity with the new teammates that we have so that we really can get outsized performance, and that’s what we saw even in April and we’re carrying that forward into May. That is the equation going forward, is we have increased capacity with more technicians, and now how do we get their productivity up, and that’s how this really becomes a healthy business very quickly.

[William Dawson:]

Got it, thank you.

[Michael Broderick:]

Thank you.

[Operator:]

Thank you William. Our next question is a follow-up question from Jonathan Lamers of BMO Capital Markets. Jonathan, back to you.

[Jonathan Lamers:]

Thanks. When I look at the stack versus calendar 2019 levels, we’re not really seeing improvement in the April and May as it’s sort of zero percent versus zero percent in fiscal Q4, so I guess my question is how much do you need to see the comp improve to start returning the gross margin percentage toward historical levels, given where staffing levels are now?

[Michael Broderick:]

We generally are looking at mid single digits, Jonathan, if that helps with identifying where’s the opportunity and where we’re focusing.

[Jonathan Lamers:]

Yes, that does help, so. The tire manufacturers have announced some pretty significant price increases recently. Do you have any comments on your pass-through of that in recent weeks and months and whether you expect to maintain your variable gross margin per tire?

[Michael Broderick:]

That is a big focus. We definitely understand there’s a lot of cost increases coming into the marketplace, and recognizing the team has done a great job managing costs and passing them along. I’ve said in the past and I’ll continue saying, we’re a rational competitor. Where we can pass along cost, we are definitely doing that. We are managing our markdowns, we are managing really our promotional activity be able to keep in line with margins, and it seems like we’re holding, at least we’re staying very consistent with industry trends. That’s more of what we’re going to be doing going forward. Last but not least is we’re going to continue to give our customers choice. Maybe they trade down into a lower cost tire based on their economic wellbeing at that point in time, but we’re still going to make good margins on those tires. It’s about getting those customers into our door. We are looking for a balanced approach to the business, both ticket which we’ve demonstrated that we can drive ticket, like most retailers right now, and now our focus is driving additional repair orders, additional customers into our stores.

[Jonathan Lamers:]

Just a last question just on the outlook for getting to mid single digit comps, is the business almost there given the turnaround in the underperforming stores, or how long should we think about things playing out before you get to that level?

[Brian D’Ambrosia:]

Yes, I think we are seeing the business on a consolidated basis build to that level, and I can say also that that comp that we’re seeing in May of plus-3 is being led by our retail locations, so we are definitely encouraged by the momentum that we are seeing. We talked about in the prepared remarks that we expect continued improvement as the year progresses.

[Jonathan Lamers:]

Okay, thanks for your comments.

[Michael Broderick:]

Thank you.

[Operator:]

Thank you Jonathan. Our next question comes from Daniel Imbro of Stephens Inc. Daniel, over to you.

[Daniel Imbro:]

Thanks for taking my questions, guys, and good morning. Brian, not to belabor a point, but I wanted to follow on Will’s question on the gross margin. A few months ago in late January, I think you noted you expected gross margin leverage. Obviously we came in a few hundred basis points below that, and if I think about it, you knew about the headcount investments, Mike just mentioned that we knew January comps were weak, so asked another way, what was the biggest surprise in the quarter versus your expectation in late January, and then given how fast that changed, how do you feel about your visibility into full year gross margin and the outlook you provided, just given the volatility we just saw in the last couple months?

[Brian D’Ambrosia:]

Yes, it’s a great question, appreciate it. I think that as you look at where we were at the end of January, we did have some expectations of recovering some of the sales loss that we saw coming through January, so not having captured that as we moved through the quarter, we did see strengthening in February but, as Mike said, it was a few weeks into February until we saw that rebound in our business. That continued to put a little bit of pressure on the top line which, as you know, puts pressure on our distribution and occupancy costs as a percentage of sales, so we lost more leverage there than maybe the comments of the third quarter call reflected. In addition, I think that we continue to make great progress in our labor investment, and I would say that we are well positioned and probably maybe a little bit ahead of schedule in terms of those hires, the incremental 200 we were able to make in Q4 even in this challenging labor environment, and certainly challenging COVID environment in Q4. Then also, I would just highlight, and Mike said, the team has done a great job of offsetting material cost increases with our sales mix shift to service but also passing through price, and I think that maybe we had a little bit of leverage in material costs factored into that outlook at the end of the quarter, last quarter where we came in more flattish as inflation built in during Q4.

[Daniel Imbro:]

Got it, and so I guess the second part of that question, when you look at the full year outlook you provided, or the commentary around gross margin, you feel comfortable given all the potential volatility in sales, we can still achieve the outlook you discussed earlier, Brian? I’m just trying to handicap maybe how volatile the model could be as we move through the year.

[Brian D’Ambrosia:]

Yes, I think Mike really highlighted the key to our ability to do that and what we’re seeing with the labor investments we have made, which is continued increased productivity in our labor. As we continue to drive productivity for the technicians we’ve added and continue to meet the demand that’s in the marketplace with more higher productive technicians, that will ultimately benefit our gross margins and our ability to take what was a headwind in labor in Q4 for margins and, as we progress through the year, turn that into more neutral, even a tailwind as we move into the later parts of this year. But just like sales, that will improve as the year progresses. There will be more pressure earlier in the year and it will improve as our productivity and sales continue to climb as the year progresses. Those are our expectations.

[Daniel Imbro:]

Got it. Last one from me, maybe just a clarifying point, Mike. You mentioned obviously labor as a point of de-leverage, but I think Brian, you just mentioned you hired a ton of people. I’m trying to square those two comments, where we left sales on the table because we didn’t have enough technicians, so that was a headwind to comps, but then we over-hired relative to expected demand and that was a headwind to gross margin. I guess. Can you square away those two statements? They seem to be contradictory. One says we have too much labor for demand, one says we don’t have enough labor. Just trying to clear up any confusion there on those two comments.

[Michael Broderick:]

Let me be crystal clear about January - that was a very difficult month for our service organization just like all retailers, but I had one-third of my stores that were affected by COVID. We hadn’t seen that type of in two years, so when I look at our investments in labor, we needed everybody, we really did. We were moving people around our stores, we were paying overtime. There was a lot of moving pieces, and I keep going back to recognizing the team, I did that in the third quarter and I’m going to continue doing that today, recognizing the team for how well they managed that. Now when you look at the financials, it definitely does put pressure on the P&L, but we actually invested through the fourth quarter so that we can have really a jumping off point for the first quarter of ’23, and as Brian stated and I’ve stated, we’re seeing it led by retail. I hope I’m clearing that up. We had pressure into the fourth quarter, but that leverage is coming through in the first quarter of ’23.

[Daniel Imbro:]

Got it. Appreciate the color, guys. Best of luck.

[Michael Broderick:]

Thank you.

[Operator:]

Thank you Daniel. That was our final question. I would like to hand back to Michael Broderick for any closing remarks.

[Michael Broderick:]

Well, thank you for joining us today. This continues to be an exciting time to be part of Monro. We have a strong foundation to build upon to create long term value for all of our stakeholders. I look forward to keeping you updated on our progress. Have a great day.

[Operator:]

Thank you. This concludes the call today. We thank you all for joining and wish you a great rest of your day. Thank you.