Monro, Inc. Q1 FY2026 earnings call

1. Closing unprofitable stores: Successfully closed 145 underperforming stores in the first quarter. These stores generated about 5% of total sales in fiscal 2025. The process of exiting real estate from these locations is expected to generate positive cash flow and be largely completed over the next 12 months. 2. Merchandising productivity: Katy Chang joined as Senior Vice President of Merchandising. She has been working with vendors to address priorities such as product availability and resetting assortment, and is mitigating tariff risk. 3. Customer acquisition and activation: Advanced targeting efforts through marketing tests at store locations, using digital tools and local media. Early results in assessed markets are encouraging. 4. Customer experience and selling effectiveness: The ConfiDrive Digital Courtesy inspection process has led to sales and unit growth in the tire category and high-margin service categories. There are also efforts to enhance the customer experience by communicating with customers before their store visits via various channels, and a task force has been established for improved guest experience.

Sales increased 2.7% to $301 million in the first quarter. Comparable store sales grew mid-single-digit, with a 5.7% increase in the quarter. Tire units were up 3%. Gross margin decreased 170 basis points compared to the prior year, primarily due to higher technician labor costs (driven by wage inflation) and material costs (due to consumer trade down to Tier 3 tires and increased self-funded promotions), partially offset by lower occupancy costs. Adjusted operating income for the first quarter was $14 million, or 4.7% of sales. Net loss was $8.1 million, and adjusted diluted earnings per share was $0.22. The 145 closed unprofitable stores generated approximately 5% of total sales in fiscal 2025.

Given uncertainty in the tariff and macro environment, no full-year fiscal 2026 guidance is provided. Expect year-over-year comparable store sales growth in 2026, primarily driven by the improvement plan and tariff-related price adjustments. The store optimization plan is expected to reduce total sales by approximately $45 million in 2026. Gross margin is expected to remain pressured in 2026, but year-over-year improvement in adjusted diluted earnings per share is anticipated. Capital expenditures are expected to be between $25 million and $35 million.

1. Uncertainty regarding tariff increases which may impact costs and customers. 2. Wage inflation leading to higher technician labor costs. 3. Consumer trade down to lower-tier tires and increased self-funded promotions affecting material costs.

Q: Congratulations on the strong quarter. Just wanted to dig into SG&A here. Once you pull out some of the onetime items, there's some really nice improvement year-over-year. Can you give me a little color on how much that improvement was from closing the unprofitable stores? And then how should we be thinking about kind of SG&A as a percent of revenue moving forward?

A: Yes, that's a great question. We had great cost control in the quarter. The team did a good job of managing store direct costs as well as our corporate costs. Some of that benefit was related to the closed stores. But as a reminder, we only had that benefit for 1 month in June, but we saw better SG&A as a percent of sales in April and May as well prior to the closures. As we think about the balance of the year, we're still looking at flattish G&A for the remaining quarters compared to the prior year.

Q: And then maybe just one more from me. Just touching on the same-store sales, 2% in July. How should we be thinking about same-store sales for the back half of the year?

A: So I think we feel pretty good about 6 consecutive months of positive comps. And remember, in the first -- or in the last quarter of the prior fiscal year, our comps were up 2.8%. So 2.8% and then 5.7%, we think, establishes us in achieving what we proposed, which is to steadily increase our comp store sales year-over-year. It doesn't mean it's going to be consistent, but steadily over the quarters, I think we're looking at positive comp store sales. So we would suggest people look less at the monthly and more at the trend, which has been pretty positive.

Q: I was just curious if you could dive into gross margin in a little more detail. So obviously declined 170 basis points year-over-year. But I was curious if you could give us more commentary on the trajectory of the year as well as how much higher technician labor costs and material costs were in the quarter and what the B&O leverage looked like?

A: Absolutely. Thanks for the question. So as you look at the components of the 170 basis point decline in gross margin year-over-year, and just as a reminder, that Q1 gross margin in the prior year is our hardest comp of the year in terms of gross margin percentage. But that decline of 170 basis points was driven by 170 basis points higher technician labor costs as a percent of sales, primarily driven by wage inflation year-over-year. There was about 120 basis points of material cost, is higher as a percentage of sales, really driven by the continued trade down into Tier 3 in the tire category as well as the effect of higher self-funded promotions year-over-year. And then finally, we saw a 120 basis point benefit of leverage on occupancy costs related to the higher comps, but also we had some benefit of the store closures for 1 month of the quarter. As it relates to the go-forward, I think that we'll see some of the technician labor cost pressure to dissipate as the comps in that category get a little bit easier as the year goes on. Same thing with the material costs. From a year-over-year perspective, the promotional activity and the trade down, we'll start to lap that. We really didn't experience that too much in Q1 of last year, but we'll experience and lap prior year trade down and prior year promotions. And then obviously, if we continue to deliver increased comparable store sales and see the continued benefit from the store closures, we'd expect to continue to leverage on D&O. So all in, I would say that we expect our gross margin compared to the prior year to narrow and then ultimately to meet as we get to the latter part of the second half.

Q: Traffic -- you said traffic was steady. Is that up? Was traffic and ticket, both up in the quarter?

A: Traffic was flat in the quarter, up some months, flat in others, and ticket was steadily up throughout the quarter.

Q: What was the net impact of closing the stores in the quarter to -- on the margin? I guess you had the benefit of lower SG&A and the benefit of occupancy level or lower occupancy. What did the store closures contribute in the quarter?

A: Yes. Without getting into specifics, I would tell you that it was a smaller piece of the benefit in those lines in the quarter, given the fact that we only had 1 month of those stores being closed. We expect it to be more meaningful, but it wasn't the bigger driver of the quarter for Q1.

Q: How should we think about second quarter costs on the closures? And you said 40 properties were owned that you're going to divest? Were those mortgaged? Or is that a real chunk of cash flow going to come out of that?

A: Yes, there's no mortgage there. All of our business is financed strictly through the revolver as well as the finance leases on our books. So we said that we thought that we would be able to generate positive cash flow related to the real estate activities that we have ahead of us, and we expect those to primarily be done over the year. So we expect it to be a source of cash from here forward related to the store closures.

Q: Nice quarter. Question I want to ask -- I mean, it's a bit repetitive, so I apologize. But just you look at the sales trajectory. So clearly, I mean, when you're talking about, we've now had this nice period of positive comps, but above the positive, there's some volatility. Just look at what went from Q4 to Q1 and then modest moderation here, at least early into the fiscal second quarter. So is there something -- is there a way to explain that? I mean recognizing your business tends to lead to short-term volatility. But is there some way to explain kind of why we're seeing this trajectory in comps?

A: Well, I would say that, as Brian has commented previously, the comps in the prior year were easier for us to perform well against than they are on a go-forward basis. But I think it's also important to focus on the work streams that we think will drive incremental profit, and they are driving traffic steadily through improving the way we go to market and reach our customers using the digital tools that we put into place. This isn't something that happens in weeks. But over the course of the rest of the year, we're going to see, I think, some incremental traffic from that. We're seeing a little bit of it in the last few weeks by focusing on those customers that are repeat customers and do buy more product for us -- product and services. And then the second thing that I think encourages us about increased sales on a go-forward basis was -- is the use of the tools that we have in the stores, mainly ConfiDrive. So what ConfiDrive enables us to do when we do it well is inspect the vehicle and tell the customer what things the customer, he or she, ought to be thinking about in order to keep their cars safe. We suggested to you that in the first quarter, we saw some really positive signs out of that. For example, we had a 26% increase in front-end shocks. That's all coming from what we learned in the ConfiDrive process. So the combination on a go-forward basis of the marketing effort and the ability to use ConfiDrive to drive incremental sales, both in the moment when the car is on the rack, and over time, when we retarget the customer after we learn what they might need, I think, will contribute to better sales performance in the latter part of the year.

Q: That's very, very helpful. And then my second -- my follow-up question, just on gross margin. Given -- it seems like as the business is evolving here, there's different puts and takes. But how should we think about what we're sort of say, playing for in gross margin, both near and longer term? What levels should we be looking at to suggest that Monro is back to a healthy state there?

A: Well, I think that, first of all -- again, the decrease in Q1 is against our toughest compare of the year. We made comments in the outlook saying that we thought gross margin was going to remain pressured for FY '26. I would kind of dimensionalize that as no better than prior year gross margins in FY '26. And the components of that are some of the things that I talked about in a previous question related to lapping some more like-for-like compares on the promotional environment, the trade down environment and the labor environment, but also knowing that we have baseline cost inflation and tariff costs building in and we're very conscious of the impact that could have on us and on our consumer. So that's the kind of look for FY '26. As we think about longer term, we think this business can continue to expand margins on a growing sales number, and that's really driven by leverage and occupancy costs as well as being able to use the merchandising programs that we have in place with Katy's onboarding to find material margins and variable margins as well.