Monro, Inc. (MNRO) Earnings

Management highlights

### Strategic Transformation Initiatives - **Profitable customer acquisition and activation**: The company has refined its marketing programs by adjusting digital marketing spend, optimizing CRM outreach, and improving call center support across 830+ stores. It now has the capability to customize marketing allocations (digital, CRM, content focused on specific product categories) to regional customer needs without increasing total marketing spend from current run rates, with potential for further optimization to trim spend. The goal is to both attract new customers and retain high-value repeat customers. - **Store customer experience and selling effectiveness**: The Confidrive vehicle inspection tool has been rolled out to nearly all vehicles entering the service network, with enhanced technician training to ensure completion and accuracy. The process builds customer trust via transparent, visual vehicle condition assessments to help customers prioritize maintenance needs. An enhanced district manager toolkit, focused on identifying gross margin and staffing improvement opportunities, has been rolled out to 150 stores, with visible profit improvements in underperforming locations, and full network rollout is ongoing. - **Merchandising productivity and tariff risk mitigation**: The company nearly completed a full reset of tire inventory across its store network, shifting to a customer-aligned assortment that accommodates the ongoing industry trend of consumer trade-down to lower-cost Tier 4 tires. It has shifted focus to optimizing parts category assortments using a consumer-centric strategic framework, while strengthening core vendor relationships to improve consistent in-store inventory availability. New demand and inventory planning capabilities are being built to improve supply precision and expand same-day product availability. Management is proactively developing pricing scenarios to offset potential cost increases from new tariffs and geopolitical tensions, while balancing competitive pricing and profitability. The company is prioritizing share growth in high-traffic categories (tires, oil changes) amid ongoing consumer deferral of high-ticket automotive spending. ### Quarterly Operational Highlights - Q4 comparable store sales declined 2% overall, with sequential improvement from January (+1%) to February (-5%) to March (-2%). Tire units declined 5% overall, in line with broader industry trends, driven by consumer deferral of high-ticket spending and shift to lower-cost alternatives. Severe winter weather in February caused temporary store closures and reduced customer traffic, disrupting winter maintenance demand, though sequential improvements in sales, tire units, and traffic were seen in March, indicating underlying demand remains intact. - April 2027 comparable store sales were up nearly 1%, while month-to-date May comparable sales are down ~3%, driven by consumer budget pressure from rising gas prices and other living costs. - Post-store closure program completed a year ago, the company has strengthened its leadership team, adding key talent and promoting internally across core functions, resulting in a substantially deeper leadership bench than at the start of the transformation. - The company announced it has launched a formal strategic review process exploring all potential value-maximizing options, including asset sales, refinancing, strategic acquisitions, operational improvements, or a full sale of the company. No timeline has been set, and no assurance of a specific outcome is provided.

Guidance

- The company maintains its expectation for year-over-year positive comparable store sales growth for full fiscal 2027, despite near-term softness in monthly comps, driven by the impact of its core performance improvement initiatives. - The 2026 store optimization plan is expected to reduce total fiscal 2027 sales by approximately $9 million in the first quarter. - Full year 2027 gross margin is expected to be consistent with fiscal 2026 levels, despite ongoing cost inflation. - Selling, general, and administrative expenses are expected to increase year-over-year, as the company invests in incremental marketing to support top-line growth. SG&A pressure will be concentrated in the first half of 2027, as the company laps prior year incremental marketing spend in the second half. - The company expects to generate sufficient cash flow and has ample liquidity to fund all its capital allocation priorities during fiscal 2027.

Segment performance

Total revenue for Q4 fiscal 2026 was $273.8 million, representing a 7.2% year-over-year decrease, driven by the closure of 145 underperforming stores and a 2.4% decrease in comparable store sales for continuing locations. The tire category, which makes up approximately 50% of total annual revenue, saw a 2% overall sales decline and a 5% drop in tire units sold for the quarter. Tier 4 tires made up 30% of total tire sales in Q4, up from 25% in the year-ago quarter. Higher-margin service categories, which account for the remaining 50% of annual revenue, continued to deliver positive value and outperformed tire segments during the quarter. Gross margin for the overall company expanded 90 basis points year-over-year to 33.9%, driven by lower technician labor costs as a percentage of sales, partially offset by higher material and occupancy costs. Total operating expenses were $98.1 million (35.8% of sales), down from $121.1 million (41.1% of sales) in the prior year quarter. Operating loss for Q4 was $5.2 million (-1.9% of sales), improved from a $23.8 million operating loss (-8.1% of sales) in the prior year. Net loss for Q4 was $6.6 million (23 cents diluted loss per share), improved from a $21.3 million net loss (72 cents diluted loss per share) in Q4 fiscal 2025. For full year fiscal 2026, the company delivered positive comparable store sales, its first positive result in three years, and generated $70 million in operating cash flow.

Risks & headwinds

- Persistent macroeconomic pressure on consumer budgets, driven by rising gas prices and broader inflation, has led to ongoing deferral of consumer spending on high-ticket automotive categories (such as tires), creating pressure on sales volume and margins. - Input cost inflation, including rising crude oil prices that impact tire material costs and higher freight and logistics costs, creates margin pressure that must be managed while remaining competitive for price-sensitive consumers. - Potential new import tariffs and ongoing geopolitical tensions in the Middle East create uncertainty around future product costs, requiring proactive contingency planning. - Near-term softness in monthly comparable sales (down ~3% month-to-date May 2027) creates timing uncertainty for hitting full year 2027 comp growth targets, even as the full year target remains in place. - The ongoing strategic review process carries no guarantee of a value-enhancing transaction or strategic outcome.

Analyst Q&A

• Q: How have rising crude prices impacted material costs so far, what is the expected impact on gross margin, what is the recent trend in consumer tire tier mix, and what are price differentials across tiers? /

  A: Management expects rising oil costs to eventually impact material and input prices, but notes strong vendor relationships and a willingness to adjust pricing and strategy as needed to maintain profitability. Tier 4 tires grew to 30% of Q4 tire sales, up from 25% a year ago, as consumers trade down to lower-cost options amid budget pressure. The typical price differential across tire tiers is $20 to $30 per tire.

• Q: Given recent soft monthly comparable sales, why do you still expect full year 2027 positive comparable sales, and how will SG&A spending trend through the year? /

  A: Management maintains the full year positive comp target because it believes its core initiatives (optimized marketing, improved store performance, better merchandising) will drive growth over the full year, despite near-term market headwinds impacting timing. Incremental marketing spending that began in the second half of 2026 will create SG&A pressure in the first half of 2027, which will ease once the company laps this incremental spend in the second half.

• Q: With expected EBIT margin pressure in 2027, what is the outlook for the company's dividend? /

  A: The company's board reviews the dividend on a quarterly basis, and management's current intention is to continue funding historical capital allocation priorities including the dividend. The board will make quarterly determinations based on current performance, projected performance, and credit facility compliance, which is consistent with the company's historical approach.

• Q: How has the consumer demand environment changed in Q4, and what impact are rising gas prices having on both input costs and consumer demand? /

  A: Demand was broadly similar in Q4 relative to prior periods, with the primary headwind being severe February winter weather that suppressed traffic, and sequential improvement seen in March. Consumers remain resilient but face growing budget pressure, leading to the observed barbell effect: growing demand for both low-cost Tier 4 tires and premium Tier 1 tires. Rising gas prices increase input costs (including freight and tire materials) that may need to be partially passed through, while also making consumers more selective about automotive spending, which management is equipped to manage via its enhanced merchandising capabilities.