MONRO, INC. Q4 FY2025 earnings call

Strengths - Business durability through cycles, leading position in fragmented market, significant scale, strong cash generation. - Industry fundamentals: over 280 million vehicles on road, vehicle miles traveled back to pre-COVID, average vehicle life over 12.5 years, shift from DIY to do-it-for-me. - Consistent cash generator with solid balance sheet. ### Key Areas of Focus - Closing unprofitable stores: 145 underperforming stores identified for closure in fiscal 2026, generating ~5% of sales in fiscal 2025. - Improving customer experience and selling effectiveness: addressing inconsistent teammate execution of core processes, leveraging Confy Drive digital courtesy and inspection. - Driving profitable customer acquisition and activation: reallocating marketing dollars to higher value customers, testing messaging, media, and promotions. - Increasing merchandising productivity and mitigating tariff risk: narrowing core tire assortment, reviewing pricing and promotions, mobilizing team to negotiate tariffs and evaluate price adjustments.

In the fourth quarter, sales decreased 4.9% to $295 million. Comp store sales increased 2.8% and decreased 3.6% unadjusted for days. Tire units were up mid-single digits, with growth above 10% in March. Gross margin decreased 250 basis points due to higher material costs from tire mix and self-funded promotions, plus technician labor cost increase. Operating loss for the fourth quarter was $23.8 million or negative 8.1% of sales. The 145 underperforming stores identified in the store portfolio review generated approximately 5% of total sales in fiscal 2025.

Given tariff uncertainties, no full-year guidance for fiscal 2026. Expect comparable store sales growth in fiscal 2026 driven by improvement plan and potential tariff-related price increases. Sales reduction of ~$45 million expected from store optimization plan in fiscal 2026. Gross margin pressured due to baseline cost inflation and tariff impacts, but expected to be partially offset by store closures and operational improvements. Expect year-over-year improvement in adjusted diluted earnings per share. Store closure costs of ~$10 million to $15 million expected primarily in first quarter of fiscal 2026. Capital expenditures expected to be $25 million to $35 million.

• Tariff-related cost increases expected to drive cost increases across major product categories. - Extreme weather in first half of fourth quarter led to temporary store closures and lower traffic. - Wage inflation increasing technician labor costs as a percentage of sales.

Q: Good morning, everyone. Nice comps this quarter. Lots of moving pieces here. I'm gonna kick things off, mate, with the gross margins. You're running some self-funded promotions. Are these the additional savings I see as an offering from the usage of the drive card? And then with these promotions and the wage inflation, is there any additional color you can provide as we're thinking about gross margins moving forward?

A: Thanks for the question, Tom. This is Brian. The gross margin impact related to the self-funded promotions is really our tire promotions and it includes some of the drive card promotions that you're seeing, but it also includes everyday offers on buy three get one brands, buy one, get one of other brands. These have been in place for a good portion of our FY25 and have been a consistent impact of year-over-year gross margins during the fiscal year. There's been no real change in the use of those self-funded promotions sequentially. But year-over-year, we do have more self-funded promotions running than we had in the prior year. Related to gross margins going forward, as we said, we expect them to remain pressured primarily due to the baseline cost increases and potential tariff impacts. Those are gonna be, you know, offset somewhat by the impact of closing the 145 underperforming stores as well as some of the benefits of our improvement plan. But as a reminder, Q1 is a particularly tough gross margin comp, but we expect that the comp related to gross margin year-over-year will continue to be pressured.

Q: Hey. Good morning, guys, and thanks for taking my questions. I was curious if you could parse out the 250 basis point decline in gross margin in a bit more and then technician labor cost as well.

A: Morning, David. Absolutely. Related to the gross margin 250 basis points quarter over quarter from the prior year. Hundred and sixty there was a hundred and sixty basis points of the 250 related to material costs. And that due to trade down within the tire category as well as well as the self-funded tire promotions we discussed earlier. About eighty basis points of technician labor costs primarily driven by year-over-year wage inflation. And then the balance is just a little bit of deleverage on the fixed occupancy cost given the loss of the extra week in the prior year.

Q: Hey. Good morning, guys.On the ATD relationship, did the economics of that change with their final payment of the earn-out? Seemed in that press release. They talked about, like, commercially reasonable support efforts. Is there anything that either either promotions or supply fill that has changed with them or pricing?

A: Yep. Bret, this is Brian. There's nothing material that's changed in our relationship with them. There was a couple things that we just clarified from the original agreement related to service levels. Just given current operating environments, but nothing that materially impacts our business. Or our relationship with ATD going forward.

Q: Hey. Good morning, guys. On the store closures, I mean, what's the common denominator? Is there a specific region or a class of stores that are underperforming cleanup or is it sort of spaced throughout the network?

A: So, Bret, it's Peter. It's spaced throughout the network. We haven't produced a list of those stores and, obviously, we need to communicate with our teammates before we do that. I would say that when you build a brand over decades, in the retail and auto aftermarket industry, you always have places that are gaining in momentum and other locations that probably aren't as strong. And so what we've chosen to do in the last two months is look very closely at those stores that we don't think can ever really produce the earnings profile that we're looking for. And those are the ones we addressed in the 145 store closings. I think that there will continue to be evaluation of stores over every year, but I don't anticipate any other store closings this year. And I'm very confident that the remaining stores are well positioned to improve their performance as time passes.