Monro, Inc. (MNRO) reported a decrease in first-quarter sales by 10.3% year-over-year, totaling $293.2 million during its earnings call for fiscal 2025. Despite the decline, the company experienced an improvement in comparable store sales trends, with notable growth in tire units in June.
Gross margins expanded, driven by labor optimization and lower material costs, with the company projecting continued margin growth and higher profitability in the second quarter. CEO Mike Broderick expressed a commitment to driving profitable growth, particularly in tire sales and service categories.
Key Takeaways
- Sales fell by 10.3% to $293.2 million, with a 9.9% drop in comparable store sales.
- Tire units saw mid-single-digit growth in June.
- Initiatives to drive growth in battery units and sales dollars.
- Gross margin expansion due to labor optimization and productivity improvements.
- Projected operating cash flow of at least $120 million for fiscal 2025.
- Planned capital expenditures between $25 million and $35 million for the fiscal year.
- Focus on gaining market share in the tire category and improving service categories.
- Staffing levels are robust, with increased technician productivity.
- Gross margins exceeded expectations in Q1, with a similar outlook for Q2.
Company Outlook
- Monro anticipates higher profitability and gross margin expansion in Q2 and throughout fiscal 2025.
- The company is set to focus on optimizing profitability in key service categories and tire assortment.
Bearish Highlights
- Sales and comparable store sales saw a significant decline year-over-year.
- Q2 comparable sales may be affected by softer compares.
Bullish Highlights
- Tire unit sales rebounded to growth in June.
- Monro is aiming to capture a larger market share in the tire category with ongoing promotions.
- Gross margins have improved, surpassing expectations due to increased productivity.
Misses
- The comp beat was less significant than anticipated, with a 10% decline instead of 12%, impacting earnings by a decrease of $0.07.
- Service category performance has not met the company's expectations, despite improvements in battery sales.
Q&A Highlights
- CEO Mike Broderick discussed strategies for profitable growth and the focus on sales in the tire category.
- Broderick highlighted the company's control over service categories and plans to gain market share in services such as brakes.
- The company reported strong staffing and technician productivity contributing to gross margin improvements.
- Despite weaker quarter-to-date comps for July compared to June, the company remains focused on continuous improvement.
Monro, Inc. concluded the earnings call by expressing enthusiasm for future progress and the creation of long-term value for its stakeholders, with a strategic focus on enhancing profitability and market share in both tire and service categories.
InvestingPro Insights
As Monro, Inc. (MNRO) navigates the challenges of a sales decline in the first quarter, a deeper look at the company's financial health and strategic moves can provide investors with a clearer picture of its potential. With InvestingPro data and tips, we can discern the underlying trends that may influence Monro's performance in the coming quarters.
InvestingPro Data highlights a market capitalization of $922.16 million, indicating the company's size and market presence. A P/E ratio of 26.53 suggests a valuation that investors are willing to pay for each dollar of earnings, which is adjusted to 23.59 when considering the last twelve months as of Q4 2024. This adjustment reflects a slightly more favorable valuation for the company.
Moreover, Monro has demonstrated a commitment to shareholder returns, as evidenced by a high dividend yield of 4.3% and the company's track record of maintaining dividend payments for 20 consecutive years, a notable InvestingPro Tip. This consistent return to shareholders is complemented by a significant one-week price total return of 7.78%, pointing to recent investor confidence.
However, it's important to be mindful of the broader financial context. While revenue growth has seen a slight decline of 3.67% over the last twelve months as of Q4 2024, Monro's gross profit margin remains strong at 35.41%, indicating effective cost management and a solid profit from sales.
InvestingPro Tips also reveal that management has been aggressively buying back shares, which can be a signal of confidence in the company's future and a potential boost to earnings per share. On the flip side, analysts have revised their earnings downwards for the upcoming period, suggesting that investors should keep an eye on the company's ability to meet future earnings expectations.
For those seeking more in-depth analysis, InvestingPro offers additional tips on Monro, Inc., providing a comprehensive view of the company's financials, strategic initiatives, and market performance. Access to these insights can be found at https://www.investing.com/pro/MNRO, where a total of 10 InvestingPro Tips are available for review, offering a valuable resource for investors looking to make informed decisions.
Full transcript - Monro Muffler (NASDAQ:MNRO) Q1 2025:
Operator: Good morning, ladies and gentlemen, and welcome to the Monro, Inc.’s Earnings Conference Call for the First Quarter of fiscal 2025. [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 would 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 2, 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. This morning, I’d like to share an update with you on our first quarter accomplishments. After that, I’ll outline several objectives that we plan to achieve in the second quarter. Before I begin, I’d like to recognize and thank all of our teammates for their dedication to Monro and our customers. Turning to Slide 3, starting with our accomplishments in the first quarter. While we are not satisfied with our top line results, we are confident that we have begun to see our recently implemented initiatives take hold. We drove a significant acceleration in our comp store sales trends as the first quarter progressed. Importantly, we turned the corner in our entire category with a return to growth in units in the month of June. We continue to leverage the strength of our manufacturer funded promotions which allowed us to meet the needs of a value-oriented consumer, while also optimizing the profitability of our tire assortment. And although we have more work to do to improve the performance of our higher-margin service categories, the combination of our ConfiDrive digital courtesy inspection process, service coupon and oil change offer allowed us to drive growth in both battery units and sales dollars in the month of June as well as an improvement in our service categories as the quarter progressed. In parallel with our topline initiatives, we continued to drive gross margin expansion in the first quarter with labor optimization through actions to reduce nonproductive labor costs, including overtime hours in our stores, labor efficiency through productivity improvements, including scheduling, training and our attachment selling initiatives and lower material costs. Our gross margin expansion in the quarter represents another major step towards restoring our gross margins back to pre-COVID levels. Now on to our objectives for the second quarter. We will leverage the traction from our initiatives in the first quarter to achieve our second quarter objectives, which include: Improving store traffic trends driven by a keen focus on oil change services as well as continued growth in tire units. Accelerating the performance of our key service categories and optimizing labor and efficiencies through continued improvements in productivity and maintaining prudent cost control. In summary, our recently implemented initiatives are beginning to drive an improvement in our topline results. Our comp store sales trends accelerated as the first quarter progressed led by our tire category, which returned to unit growth in June. While we have more work to do to improve the performance of our higher margin service categories, growth in batteries in June as well as an improvement in our service categories as the quarter progressed, serve as evidence that our initiatives are working. Our gross margin expansion in the quarter through labor optimization, labor efficiency through productivity improvements and lower material costs gives us further confidence 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. The initiatives we put in place will enable us to achieve our second quarter objectives. And with that, I’ll now turn it over to Brian, who will provide an overview of Monro’s first quarter performance, strong financial position and additional color regarding fiscal 2025. Brian?
Brian D’Ambrosia: Thank you, Mike, and good morning, everyone. Turning to Slide 4. Sales decreased 10.3% year-over-year to $293.2 million in the first quarter, primarily driven by a 9.9% decline in comparable store sales. As Mike just walked through, we drove a significant acceleration in our comp store sales trends as the quarter progressed. For reference, comps were down 13% in April, followed by a slight improvement to down 11% in May, and we exited the quarter down 5% in June. While tire units were down 5% in the first quarter, we returned to mid-single-digit growth in units during the month of June. Our tire market share improved as the quarter progressed, and we maintained share in our higher-margin tiers. Comp store sales in our 300 smaller underperforming stores were consistent with our overall comp in the quarter. Turning to Slide 5. Gross margin increased 220 basis points compared to the prior year, primarily resulting from lower technician labor costs and lower material costs as a percentage of sales, which were partially offset by higher fixed occupancy costs as a percentage of sales. Total operating expenses were $95.9 million or 32.7% of sales as compared to $97 million or 29.7% of sales in the prior year period. The decrease on a dollar basis was principally due to lower store direct costs compared to the prior year period. Operating income for the first quarter declined to $13.2 million or 4.5% of sales. This is compared to $17.3 million or 5.3% of sales in the prior year period. Net interest expense decreased to $5.1 million as compared to $5.2 million in the same period last year. This was principally due to a decrease in weighted average debt. Income tax expense was $2.3 million or an effective tax rate of 28.5%, which is compared to $3.4 million or an effective tax rate of 27.6% in the prior year period. Net income was $5.9 million as compared to $8.8 million in the same period last year. Diluted earnings per share was $0.19. This is compared to $0.28 for the same period last year. Adjusted diluted earnings per share, a non-GAAP measure, was $0.22 and this is compared to adjusted diluted earnings per share of $0.31 in the first quarter of fiscal 2024. Please refer to our reconciliation of adjusted diluted EPS in this morning’s earnings press release, and on Slide 9 in the appendix to our earnings presentation for further details regarding excluded items in the first quarter of both fiscal years. As highlighted on Slide 6, we continued to maintain a very solid financial position. We generated $26 million of cash from operations during the first quarter. This has reduced our cash conversion cycle by 15 days at the end of the first quarter compared to the prior year period. Our AP to inventory ratio at the end of the first quarter was 172% versus 164% at the end of fiscal 2024. We received $4 million in divestiture proceeds. We invested $9 million in capital expenditures, spent $10 million in principal payments for financing leases and distributed $9 million in dividends. At the end of the first quarter, we had net bank debt of $93 million, a net bank debt-to-EBITDA ratio of 0.7x and total liquidity of $477 million. Now turning to our expectations for the second quarter as well as the full year of fiscal 2025 on Slide 7. Although our preliminary comp store sales are down 7.6% in fiscal July, we expect to continue to deliver higher levels of profitability relative to our sales in the second quarter. Similar to the first quarter, we expect to deliver this through higher gross margins than the prior year period, primarily from lower technician pay as a percentage of sales from continued gains in labor efficiency and productivity as well as prudent cost control. For full year fiscal 2025, we expect gross margin expansion versus fiscal 2024. We also believe our fixed occupancy costs within cost of goods and operating expenses will be approximately flat on a dollar basis when compared with the prior year. Please note that fiscal 2025 is a 52-week year, while fiscal 2024 was a 53-week year that benefited from an extra week of sales in the fourth quarter. We expect to generate at least $120 million of operating cash flow, inclusive of continued working capital reductions in fiscal 2025. The strength of our financial position, including our cash flow positions us to fund all of our capital allocation priorities, including our dividend during fiscal 2025. Regarding our capital expenditures, we expect to spend $25 million to $35 million in fiscal 2025. And with that, I will now turn the call back over to Mike for some closing remarks.
Michael Broderick: Thanks, Brian. Our business has long-term durability in an industry that remains fundamentally strong. We have implemented initiatives that are beginning to drive an improvement in our topline results. This, along with our foundational progress to expand margins and generate cash flow will enable Monro to reap benefits as tire volumes continue to recover. We are poised to win with our scale, strategic relationships and our experienced management team. With that, I will now turn it over to the operator for questions.
Operator: [Operator Instructions] The first question is from Brian Nagel with Oppenheimer & Co.
Brian Nagel: Congrats on a good progress here. So the first question I have is, Michael, this -- I mean maybe you talked a lot about the -- Michael and Brian, you both talked a lot about the improvement in sales with the topline improvement as the quarter progressed. But could you go into a little more detail about really what, from your perspective, help to drive that, the more significant improvement in the month of June. And it sounds like it was more in the tire category. I guess the question I’m asking is that, did you see -- is it your initiatives? And maybe you can describe that more? Or are you starting to see also an improving sector backdrop? Because I know this over the last few quarters, we’ve talked about a really difficult backdrop for the sector?
Michael Broderick: Brian, I’ll take it. It’s Mike. First of all, we are on a journey for a profitable growth. So I kind of looked at it. We started with tires going through this. I would say the consumer, we don’t see anything different in the consumer from the last time we talked. But we did talk about the fact that the tire category is very much in our control. And the decisions that we made going back to when we last presented in May is that we were going to become highly promotable and we were going to lead with tires, and we were going to go get the tires back. Although we were -- tire units are down in the industry, we talked about that. That still hasn’t changed. There’s still a lot of tires being sold and we were going to get more than our fair share. That was the decision that we made. We were going to rely on our vendor partners to help support us, making sure that they are helping us drive value with the tire category. I would say that we started seeing unit growth in June. We expected that and I would say that we’re going to continue literally as long as the consumers the way they are acting right now, we’re going to stay very high promotions or strong promotions in order to drive the tire category. Now let’s turn the conversation which really is the focus of my attention, my organization’s attention. The service categories, highly profitable service categories are still underperforming. I like what batteries are doing, I actually consider, hey, do we have a little weather bump in June because we got a lot of hot weather. And I think a credit a little bit of that to weather. But we also really put together an inspection process, we call it ConfiDrive, driving a better process in the store, and we continue in the month of July, strong battery performance. So I really do credit a lot of the focus on batteries to just a better inspection process, but I’m not happy with our service category. I don’t think the consumer is -- has changed just like we’ve done with tires, we’re going to go get back our service categories. And that’s across the board. And I really feel that’s very much in our control, has nothing to do about the consumer. There’s still a lot of brakes being sold in the marketplace, and we’re going to go get more than our fair share of breaks. And last, Brian, just -- none of this has to do with the staffing. We’re in good shape. We have more technicians than we did last year. When I talk about technicians, these are flat-rate technicians. Most of our productivity initiatives that we put in place are making our hourly employees become more productive. In the past, I talked about them it’s taken as long as 90 days to get them productive, and now we’re talking about 3 weeks. And that’s the big change in our organization, and it’s really a Monro story. And I’ve talked about this before, Brian. It’s a self-help story, and I still believe it’s a very much of a self-help story.
Brian Nagel: Mike, that’s helpful. And if I can just follow up. So if I’m hearing you correctly, in the tire categories, you’ve gotten more promotional, and that’s helping to drive this better unit demand. So to make sure I heard that correctly. But I guess, help me understand, I mean your big bright spot in the quarter was, in my mind, the gross margins. So you’re driving the gross margin gains despite being more commercial in the entire category?
Brian D’Ambrosia: Yes, that’s right, Brian. So as Mike mentioned, we are promoting more in our Tier 1 through 3. So we’ve got great offers across our screen, but we’re really doing it led by manufacturer funded promotions. There is some Monro funding, but it’s happening primarily through our manufacturer partners, which is allowing us to preserve and expand material margins in our tire category more preserve our material margins on the tire side while also driving more units through providing a better value at those tiers. And so our tire unit growth that we saw as the quarter went on really was led by an accelerating Tier 1 through 3 category based on those promotional activities that our vendors funded.
Operator: The next question is from Bret Jordan with Jefferies.
Bret Jordan: Could you talk about, I guess, what the price versus unit or traffic impact was on the Q1 comp is?
Michael Broderick: Yes. Price was slightly up, and you can do the math on the rest and ticket was -- when I look at traffic, it was significantly down, and that’s what we’re focused on. When I look at June, and specifically on the tire category, it was basically flat in units and flatten ticket.
Bret Jordan: Okay. And then the oil price promotional strategy, I think Bridgestone, Firestone is doing similar. Do you see sort of a broader traffic driver in the oil category? Is it sort of a -- is it a managed discounting? Or are things getting more competitive out there?
Michael Broderick: It’s a managed discounting. It’s really very much of a focus on making sure that we say yes to our consumers. I would say that as the consumers are looking for more value, they can see the promotions that we have. And then really, the work that we have to do, Monro has to do is making sure that when these customers walk in that we can take care of their needs within 45 minutes, and as we do that we get rewarded with sales.
Bret Jordan: Yes, yes. It seems -- can I -- on the 300 units you call out in line with the company average, I guess, what was the 2-year stack for those? Are they generally in line with the company that they’re no longer underperforming? Or was that -- are there on a 2-year basis still dispersion?
Brian D’Ambrosia: We didn’t disclose the 2-year numbers, but I mean, there’s still opportunity in those stores. So the run rate has slowed down versus the outsized performance that they saw relative to the chain when we launched the initiative. But we expect that over time and in improving tire environment moving forward, at least tire productivity from Monro, we’ll see those stores respond in an outsized way from a top line. So those are still multiyear comp growers.
Operator: The next question is from David Lantz with Wells Fargo.
David Lantz: I guess in relation to gross margin being up 220 basis points in the quarter. Curious if you can talk about how that shook out relative to internal expectations? And for guidance in Q2 being up, curious if you can give a little bit more color there as well.
Brian D’Ambrosia: Yes, it exceeded our expectations. So obviously, when we talked last, we said that if we continue to run where we were running through the first half of the quarter, we expect it to be flat in EPS and really the bridge between flat EPS and then the $0.22 adjusted for the quarter was driven by, first of all, a comp beat. So we didn’t run down 12%. We ran down 10% relative to that run rate, and that’s about $0.07 and then the balance is gross margin that exceeded our expectations. It was really driven by really strong productivity in the back half for technician productivity. The team did a great job of responding to those higher tire volumes than we were running in a really productive way without having to add a lot of labor to meet that demand. And so we saw productivity really increase in the back half. What I would say is that there is still durability to those productivity levels and that our expectations are that we can continue to achieve similar gross margin results as we move forward here into Q2.
David Lantz: And just to clarify that, the similar gross margin results are you talking about on a year-over-year basis or a rate basis?
Brian D’Ambrosia: More of a rate basis, the year-over-year fluctuates a little bit, mostly they stay in the 35s for the balance of the year, but more on -- so the delta isn’t too different either way you look at it. But 37s is something that we have our sights on for the quarter as well for Q2. And that certainly will be supported by what Mike was talking about earlier with improvements in our higher-margin service categories.
David Lantz: Got it. That’s helpful. And then on -- can you help with the gross margin buckets in a little bit more detail, too, just between D&O material costs and technician labor?
Brian D’Ambrosia: Yes, absolutely. So labor was a 240 basis point improvement year-over-year as a percent of sales. The material costs was a 100 basis point improvement year-over-year as a percent of sales. That was largely driven by our service categories and improvement in margin in our service categories and a flattish margin year-over-year in our tire category like we’ve had answered earlier, preserving those margins despite the promotional activities we undertook on the backs of our vendors. And then we saw 120 basis points of deleverage in our occupancy costs relative to the lower sales against the fixed occupancy costs.
David Lantz: Got it. That’s really helpful. And then last one for me. The quarter-to-date comps for July are a bit weaker than June. Curious if you can talk about the drivers of that and if it’s just really a function of compares or if there’s something else going on?
Michael Broderick: David, this is Mike. I’ll take that. There’s nothing going on. I would say that it is a soft to compare, but we’re very focused on just continuing to get – to improving quarter-over-quarter since I don’t have a crystal ball of what’s going to happen for the rest of the year. And last but not least, I want to leave with happy with the tire. We’ll continue with the tire unit story, and now it’s all about moving to service categories that obviously have a significant margin opportunity for our company.
Operator: We currently have no further questions. I’ll hand back over to Mr. Broderick for closing remarks.
Michael Broderick: Thank you for joining us today. This continues to be an exciting time be part of Monro. We have a strong foundation to build upon to create long-term value for all of our stakeholders. I look forward to keeping you updated on our progress. Have a great day.
Operator: Thank you. This concludes today’s call. Thank you all for joining. You may now disconnect your lines.
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