MONRO, INC. Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Third Quarter Accomplishments: Drove sequential improvement in year-over-year comp store sales, returning to growth in December. Tire dollar and unit sales improved sequentially, with tire category sales comp positive in December. Leveraged manufacturer-funded promotions and the ConfiDrive Digital Courtesy Inspection Process to enhance communication and selling, building trust with customers. Service category comp store sales improved, with year-over-year growth in units and sales dollars for batteries, alignment, and front-end shocks.
• Fourth Quarter Objectives: Preliminary January comp store sales down 1% adjusted for an additional selling day, impacted by tire category weakness due to extreme weather, but service categories strong. Expect to leverage initiatives to improve store traffic, tire units, service category performance, labor efficiencies, and cost control.

Segment Performance

• Comparable Store Sales: Year-over-year comparable store sales percentage change improved 500 basis points sequentially from the second quarter of fiscal 2025. Sales were $305.8 million, down 3.7% year-over-year, primarily driven by a 1.9% decline in unadjusted comparable store sales; adjusted for days, comp store sales decreased 0.8%. Returned to year-over-year comp store sales growth in December. Tire units were up low-single-digits in the third quarter, with mid-single-digit growth in December. Gained tire market share in higher-margin tiers. Comp store sales of approximately 300 small or underperforming stores were 250 basis points higher than the overall comp.
• Gross Margin: Decreased 120 basis points year-over-year, primarily due to higher material costs from tire mix and increased self-funded promotions to attract value-oriented consumers, partially offset by lower technician labor costs as a percentage of sales.
• Operating Expenses: Total operating expenses were $94.8 million (31% of sales) compared to $91.3 million (28.7% of sales) in the prior year period, driven by higher store direct and departmental costs.
• Operating Income: Operating income declined to $10 million (3.3% of sales) from $21.4 million (6.7% of sales) in the prior year.
• Net Income: Net income was $4.6 million compared to $12.2 million in the prior year. Diluted earnings per share was $0.15, and adjusted diluted earnings per share (non-GAAP) was $0.19.

Guidance

• Expect to generate at least $120 million of operating cash flow in fiscal 2025, inclusive of continued working capital reduction.
• Capital expenditures are expected to be $25 million to $30 million in fiscal 2025.
• Strong financial position to fund capital allocation priorities, including dividends, for the remainder of fiscal 2025.

Risks

• Consumer trade down leading to higher material costs from tire mix and pressure on gross margin due to self-funded promotions.
• Extreme weather impacting store traffic and sales in the short term, though seen as a potential benefit in future months.

Question and Answer

Q: Seth Basham asks about gross profit comps improvement.

A: Brian D'Ambrosia states material costs are driven by tire trade down and self-funded promotions, expecting similar pressure going forward.

Q: Seth Basham asks about weather impact on Q3.

A: Michael Broderick says Q3 weather was neutral, and January's extreme weather is a good setup for future.

Q: David Lantz asks about ConfiDrive benefit on service categories.

A: Michael Broderick says ConfiDrive drove improvement in service category traffic and average ticket.

Q: David Lantz asks about SG&A.

A: Brian D'Ambrosia says increase in SG&A is due to front shop labor investment for ConfiDrive, expecting G&A to reflect this investment.

Q: Thomas Wendler asks about Tier-3 tire mix.

A: Michael Broderick says Tier-3 mix is in the high 20s/low 30s, driving customers to Tier-1-3, not just Tier-4.

Q: Bret Jordan asks about traffic vs price comp.

A: Michael Broderick says low-single-digit traffic down, mid-single-digit ASP up.

Q: Bret Jordan asks about ATD and regional performance.

A: Michael Broderick says ATD receivable is $6.8M, with regional performance mixed, and the South stronger.

Q: Brian Nagel asks about gross margin progression.

A: Michael Broderick says trade down and consumer environment impacted margin, but service categories are starting to come to life.

Q: John Healy asks about SG&A and tire tiers.

A: Brian D'Ambrosia explains SG&A impacted by front shop labor for ConfiDrive, and tires have a $20-30 price difference, with stronger margins in Tier-1-3.