Monro, Inc. (NASDAQ:MNRO) Q3 2024 Earnings Call Transcript
Monro, Inc. (NASDAQ:MNRO) Q3 2024 Earnings Call Transcript January 24, 2024
Monro, Inc. misses on earnings expectations. Reported EPS is $0.3781 EPS, expectations were $0.4. MNRO isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, ladies and gentlemen, and welcome to Monro Inc.'s Earnings Conference Call for the Third Quarter of Fiscal 2024. 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. [Operator Instructions] And 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'd 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. If I could draw your attention to the Safe Harbor statement on slide two, 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, Michael Broderick.
Michael Broderick: Thank you, Felix and good morning, everyone. I'd like to spend the first part of our call this morning walking through our third quarter performance, which reflected top line results that were challenged. This was due to milder weather as well as a pressured low to middle income consumer that continued to defer purchases in our high ticket tire category. This was clearly evidenced by an industry-wide slowdown in tire unit sales in the regions of the country where a vast majority of our store footprint is concentrated. We continued to mitigate the impact of this slowdown with actions to reduce non-productive labor costs. Despite a tough macroeconomic environment, the resiliency of our business model and the actions that we've taken allowed us to expand gross margin in the quarter.
I'll also discuss our plans to deliver an improvement in our diluted earnings per share this fiscal year despite some of the consumer related headwinds that we and others in our industry are experiencing. Before I get started, I'd like to recognize and thank all our teammates for serving the needs of our customers. Now, turning to our third quarter results. Our third quarter comparable store sales declined approximately 6% from the prior year period. Comp store sales in our 300 small or underperforming stores were consistent with our overall comp in the quarter. As I stated earlier, our sales results in the quarter continue to be challenged by consumer deferrals of tire purchases as evidenced by an industry-wide slowdown in tire unit sales.
This led to pressured store traffic which was not supportive to sales of our higher margin service categories in the quarter. While our tire units were down approximately 14%, leveraging the strength of our manufacturer funded promotions allowed us to optimize our assortment for improved tire profitability in the quarter. And while continued consumer trade down dynamics led to a higher proportion of lower margin opening price point tires within overall industry unit sales, we remained focused on maintaining a healthy mix of opening price point tires in the quarter. Encouragingly, based on retail sellout data from Torqata, a subsidiary of ATV, our tire market share remained broadly in line with the overall market in our higher margin tiers. We continue to mitigate this industry-wide slowdown in tires with actions to reduce non-productive labor costs, including overtime hours in our stores, which were down 25% year-over-year.
This allowed us to expand gross margin even on lower sales volumes. We will continue to closely manage our labor costs and expense to maximize profitability. Now, concluding with our plans to deliver an improvement in our diluted earnings per share this fiscal year, despite a choppy consumer environment. While our preliminary comp store sales for fiscal January are down approximately 6% due to softness in the first half of the month, comps have accelerated materially in the last two weeks with the return of normal seasonal weather. We have some easier prior year compares in February and March. But given the current pressures on the consumer, we no longer expect to grow full year sales. However, we do expect full year diluted earnings per share to be higher versus prior year.
This will be driven by actions we've taken to successfully reposition our cost structure, as well as expanding our gross margin through properly training our teammates to maximize their productivity and optimizing our tire assortment for improved profitability. We will continue to remain relentlessly focused on improving our 300 small or underperforming stores, maintaining a balanced approach between our tire and service categories with competitive pricing to drive store traffic, and continuously improving our customer experience. In addition, we will continue to create cash by optimizing inventory and leveraging the strength of our vendor partners for better availability, quality, and cost of parts and tires in our stores. In closing, despite the challenges posed by the current macroeconomic environment, our business continues to be well positioned, and we are confident that we remain on a path to restore our gross margins back to pre-COVID levels with double-digit operating margins over the longer term.
With that, I'll now turn the call over to Brian, who will provide an overview of Monro's third quarter performance, strong financial position, and additional color regarding the remainder of fiscal 2024. Brian?
Brian D’Ambrosia: Thank you, Mike and good morning, everyone. Turning to slide eight. Sales decreased 5.2% year-over-year to $317.7 million in the third quarter, which was primarily due to lower tire unit sales. Comparable store sales decreased 6.1%, and sales from new stores increased approximately $1 million. Gross margin increased 170 basis points compared to the prior year, primarily resulting from lower material costs and technician labor costs as a percentage of sales, which were partially offset by higher distribution and occupancy costs as a percentage of sales. Total operating expenses were $91.3 million, or 28.7% of sales, as compared to $89.6 million, or 26.7% of sales in the prior year period. The increase as a percentage of sales was principally due to lower year-over-year comparable store sales.
Operating income for the third quarter declined to $21.4 million, or 6.7% of sales. This is compared to $23.8 million, or 7.1% of sales in the prior year period. Net interest expense decreased to $5 million, as compared to $5.9 million in the same period last year. This was principally due to a decrease in weighted average debt. Income tax expense was approximately $4.2 million or an effective tax rate of 25.8%, which is compared to $5 million or an effective tax rate of 27.6% in the prior year period. Net income was approximately $12.2 million as compared to $13 million in the same period last year. Diluted earnings per share was $0.38 compared to $0.41 for the same period last year. Adjusted diluted earnings per share, a non-GAAP measure, was $0.39.
And this is compared to adjusted diluted earnings per share of $0.43 in the third quarter of fiscal 2023. Please refer to our reconciliation of adjusted diluted EPS in this morning's earnings press release, and on slide eight in our earnings presentation for further details regarding excluded items in the third quarter of both fiscal years. As highlighted on slide nine, we continue to maintain a very solid financial position. We generated $130 million of cash from operations during the first nine months of fiscal 2024, including $30 million in working capital reductions. This has reduced our cash conversion cycle by approximately 60 days at the end of the third quarter compared to the prior year period. Our AP to inventory ratio at the end of the third quarter was 179% versus 178% at the end of fiscal 2023.
We received $16 million in divestiture proceeds, and we invested $19 million in capital expenditures, spent $29 million in principal payments for financing leases, and distributed $27 million in dividends. Lastly, repurchases of our common stock were approximately $44 million under our share repurchase program, which authorizes us to repurchase up to $150 million of the company's common stock. We've used our significant cash flow to reduce invested capital by $83 million during the first nine months of fiscal 2024. At the end of the third quarter, we had bank debt of $94 million, cash and cash equivalents of $24 million, and a net bank debt to EBITDA ratio of 0.5 times. While we're not providing guidance for the remainder of fiscal 2024, we are providing color to assist in your modeling.
We expect lower year-over-year full year sales, inclusive of an extra week in our fourth quarter. We expect to drive year-over-year improvements in our gross margin through pricing actions, tire mix optimization, and productivity improvements from our labor investments, which will be partially offset by continued wage inflation. Total operating expenses at the percentage of sales are expected to be higher year-over-year due to increases in direct and departmental costs to support our store base, as well as the impact of inflation and lower sales volume. Our tax rate should be approximately 25% for fiscal 2024. Regarding our capital expenditures, we expect to spend approximately $30 million to $35 million in fiscal 2024. We also expect to continue improving our operating cash flow driven by continued working capital reductions.
Our balanced approach of returning capital to shareholders through dividends and share repurchases, as well as opportunistically completing value-enhancing acquisitions, is expected to meaningfully increase our return on invested capital. And with that, I will now turn the call back over to Mike for some closing remarks.
Michael Broderick: Thanks Brian. We remain laser-focused on our initiatives to improve sales, expand margins, and create cash. Although we still have important work to do, we are well-positioned to execute our growth strategy and deliver long-term value creation for our shareholders. With that, I will now turn it over to the operator for questions.
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