Good morning, ladies and gentlemen, and welcome to Monro, Inc. Earnings Conference Call for the Third Quarter Fiscal 2019. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, ladies and gentlemen, 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 Ms. Maureen Mulholland, Senior Vice President, General Counsel and Secretary at Monro. Please go ahead.

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 the call this morning, we will be referencing a presentation that is available on the Investors section of our website at corporate.monro.com/investor/investor-resources. If I could draw your attention to the safe harbor statement on Slide 2 of the presentation, I'd like to remind participants on this morning's call 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. Reconciliations of such supplemental information to the comparable GAAP measures will be included as part of today's presentation. With that, I'd like to turn the call over to our President and Chief Executive Officer, Brett Ponton.

Thank you, Maureen, and good morning everyone. Thanks for joining us today. We delivered another quarter of solid top line and bottom line growth, reflecting strong execution across our business as we continue to make progress on our Monro. Forward strategy. Overall, we achieved comparable store sales of 3.3% in the third quarter when adjusted for one less selling day compared to the prior year period due to the Christmas holiday shift. Importantly, this marks our fourth consecutive quarter of positive comparable store sales and represents the highest quarterly comparable store sales increase since the third quarter of fiscal 2011. Similar to the last quarter, our comp performance was driven by a higher average ticket from improved in-store execution and sustained strength in our tire and brake categories. We believe that these positive top line trends are a testament to our relentless focus on driving operational excellence and delivering a consistent five star experience to our customers. We also believe that they reflect the outstanding efforts and ongoing commitment of our teammates who have enthusiastically embraced the changes we are implementing across our organization to drive increased customer lifetime value and sustainable long-term growth. In addition, we achieved record third quarter earnings per share, while continuing to invest in our strategic initiatives. I would now like to provide an overview of the comparable store sales trends we experienced during the quarter. As illustrated on Slide three, we saw accelerated top line growth in October and November, which was partially offset by a slowdown in comparable store sales in December, resulting from mild winter weather conditions we experienced across our markets. Specifically, while we saw early snowfall above last year's levels in November, which contributed to our top line strength during the month, this was partially offset by limited snowfall in…

Thank you, Brett, and good morning, everyone. Turning to Slide 8 of the presentation, we delivered solid top line performance in the third quarter. Sales increased 8.5% year-over-year to $310.1 million, driven by sales from new stores of $19.8 million, including $14.3 million from recent acquisitions, and a comparable store sales increase of 3.3% when adjusted for one less selling day in the current year quarter due to a shift in the timing of the Christmas holiday from the fourth quarter in fiscal 2018 to the third quarter in fiscal 2019. This was offset by a decrease in sales from closed stores of approximately $1.3 million. The third quarter had 89 selling days compared to 90 in the prior year period. As of December 29, 2018, the company had 1,186 company-operated stores and 99 franchise locations, as compared with 1,138 company-operated stores and 103 franchise locations as of December 23, 2017. During the quarter, we added 9 company-operated stores and closed one. Gross margin increased 60 basis points to 38% in the third quarter of fiscal 2019 from 37.4% in the prior year period. This increase was largely due to continued benefit from our Good-Better-Best service packages and our optimized store staffing model, as well as a decrease in distribution and occupancy costs as a percentage of sales, as we gained leverage on these largely fixed costs with higher comparable store sales. This was partially offset by the impact of sales mix from the Free Service Tire acquisition. As we've previously noted, the commercial and wholesale locations we acquired as part of the Free Service Tire acquisition operate at a lower gross margin, primarily due to the higher sales mix of tires, and with respect to the wholesale business, higher sales mix of tires without installation. Operating expenses for the…

Thanks Brian. In summary, we had another strong quarter of execution, delivering our fourth consecutive quarter of comparable store sales growth and are encouraged by positive top line trends we experienced in the second half of January. Our Monro. Forward initiatives are shaping up nicely. We look forward to capitalizing on the success of our operational excellence and store re-image pilot program by expanding these efforts across our store base. Importantly, acquisitions remain a cornerstone of our growth strategy as evidenced by the new state we will add to our geographic footprint in the fourth quarter and $87 million in annualized sales from fiscal 2019 acquisitions. Looking ahead, we remain confident in our outlook for fiscal 2019 and in our ability to continue creating long-term value for our shareholders. With that, I will now turn the call over to the operator for questions.

[Operator Instructions] Our first question comes from the line of Brian Nagel with Oppenheimer and Company. Please proceed with your question.

So, I want to start -- I've asked you this type of a question in the past, I want to ask again, just as we continue to push forward with the internal initiatives, but at the same time, the backdrop for your business -- your sector has clearly improved. So, if we look at the results today, how much of the continued acceleration, if you will, in comps you think relates to the internal initiatives versus an improved backdrop?

I think, Brian, I'll give you the consistent answer I've shared with you previously on this point. I think first of all, I want to give credit to our team internally. I think, they've done everything we've asked them to do and they've embraced the culture change and have been very supportive of the initiatives that we have driven over the past year. So, I'd like to give them credit, number one. Number two, I think starting last year, certainly the macro environment became more net favorable. Our first quarter had a favorable backdrop with a fairly harsh winter last year that created a good favorable environment for us throughout the spring selling season that helped contribute to our strong brake performance that led in, I think, to a strong summer, traditional summer season as well. Rolling into our Q3, most recently here, as we talked about, certainly we got a little weather help early in November that probably drove some outsize performance in November when you look at snowfall in November year-on-year compared to last year, and then that reversed itself a little bit in December, as we saw. But from that, I'm encouraged by how we recovered in the second half of January and we're back on kind of a mid-single digit comp pace that we saw leading into the holiday season. So, I think it's always difficult to parse out. I want to give credit to our team, but also I think the macro has improved to somewhat normalcy, and certainly, the longer term view is, the car part continues to age and drive further opportunities for us in our cohort, which is 6 to 12-year old vehicles.

And then I have a follow-up. Now, It's kind of merged maybe two questions together here. With regard to the stores in your home market that you've retrofitted, you discussed this in your prepared comments, but maybe -- can you give us a better idea -- and I know it's early, but what we've seen as far as outperformance in those units now that they are -- been sort of, say, fixed up? And then a second question is -- it is more mechanical in nature, but you talked about the impact of the calendar shift on your fiscal Q3 comps and we discussed, I guess, Q4 to date comps. How is -- how does that calendar shift, if at all, affect what we've seen so far in Q4?

I'll take the first part and let Brian reply to the second part. So, related to the pilot stores in Rochester on the re-image, we completed that in its entirety, I would say, late November, end of December, Brian. So, it's really early innings of course when you look at more macro traffic/sales trends. There are some underlying metrics that we look at pretty hard. One is, let me bifurcate this, there's two parts of what we're doing when we re-image a market. Number one, we installed a new playbook, the new procedures in-store, and our expectation there is that would drive improved conversion in-store while driving higher customer satisfaction rates in the process. And we look at metrics, early indicators on that, we're seeing positive trends on customer satisfaction, net promoter score, as well as improved conversion that we saw with our initial pilot stores of four. As it relates to the re-image, we would expect that over time to help drive satisfaction, but also traffic trend improvements. And I think given the fact we just wrapped that up in late November, December, clearly it's too early on that. But, I think the, the metrics that we see underlying, customer satisfaction bode pretty well for how we would expect that translate into traffic trends going forward. I'll let Brian comment on the calendar shift.

Yes. So, as far as it goes with the 2%, that 2% that Brett talked about is the reported number. He also commented in his prepared remarks that, that number is helped by -- about 300 basis points were the extra day that we've had in January with the calendar shift. I think if you look at the way kind of the quarter set up, we were up about 7 in October, up about 7 in November, down 6 adjusted for days in December, probably down low-single digits in the first part of January when we had that consistently mild weather that we saw also in December. And then once we got a little bit of harsher weather later in the month, that's what Brett said, we've been up about mid-single digits since then. So, clearly that, that run up to the holiday and that softness right after the holiday correlate pretty closely to the weather we saw. We're encouraged that the trends we're seeing now are kind of re-reflective of what we saw back in October and November.

Our next question comes from the line of John Healy with Northcoast Research. Please proceed with your question.

Brett, I want to ask you a little bit about your comment about the changing of the tire mix a little bit. And it sounded like to me that you guys were planning on mixing up the tires and maybe going towards a little bit more premium. So, I was hoping to understand kind of what's really the operational strategy there and why going higher for your customer mix is it the right move?

I don't know that if we necessarily imply that John, but let me give you some context on how we think about the tire category. Today, we currently do business with north of 10 different tire manufacturers, and there, I'll give you some color on the pricing environment. Certainly, in the last quarter of last year, we saw some tire manufacturers take some pricing actions. Given our scale and our size, of course, we feel like we're well positioned to mitigate vast majority of those. But certainly, I wouldn't characterize those price increases as industry-wide. We have some suppliers of ours that chose not to take price, others that have. Given our size and scale, we're using this as an opportunity to kind of reassess our product assortment and realign potentially in areas that create the best value for us and our consumers. It doesn't necessarily mean trying to shift our strategy up or down in the product stream. Just overall, we're going to look for the best options available for us to create the best value for consumers and Monro. The second part that we're looking at doing, that we'll rollout next year, is really looking for ways we can become more efficient on opening price point tires. So, we're evaluating right now the opportunities to consolidate, become more efficient on the lower end of our product screen that creates more flexibility in our product screen on, call it, tier 3, tier 2 and tier 1 tires, again, leveraging the portfolio of manufacturers that we have to consider from.

And I just wanted to ask a clarification question. I thought you mentioned that as we started 4Q in January, comps were running up 2% or so. Is that on a same day basis, or is there any movements of the days that are either helping or hurting that 2% number?

Yes, that 2% is as reported. It's helped by about 300 basis points related to an extra day because of the shift.

Hi, John, maybe just to add some color there, as we mentioned previously there, we kind of see the month January in two parts of the month; the first part of the month was quite a bit softer, the second part of the month, we saw demand pick up mid-single digits, which is kind of in line with what we saw, call it, October, November. So, clearly the holiday period created some challenges and softness for us. But exiting that second half of the month of January, we've seen kind of a normalcy or return to normalcy that we saw leading in.

And then just one final question, coming off probably what's been a better calendar year for folks in the industry, is that helping or is that hurting your M&A pipeline, do you think?

And I can say that our pipeline has never been as robust as it has been for me since I've been here at Monro. So, despite maybe a little more favorable calendar year, I think, now that the tax law certainty has kind of flushed its way through, our M&A activity is very robust and our pipeline is very active. So, we feel very good about our growth prospects going forward.

Thank you. Our next question comes from the line of Bret Jordan with Jefferies. Please proceed with your question.

Just follow up on the Amazon partnership. Maybe if you can talk about how many stores we're doing now and what we're seeing as far as maybe attached sales as those customers are coming in, how that Amazon customer profile differs from other, either online referral or core customers?

Yes. Sure, Bret, I'll take it. Look, maybe, before I dive into the specifics on that, I'd like to maybe just reiterate why we're doing Amazon. So, I think -- in our business at Monro, we believe we're a value-added retailer/service providera real strong brick and mortar presence, and we think tires, like other services for your car that require installation or value-added provided to it, lends itself well for Monro and other brick and mortar suppliers out there to participate. So, you couple that with pretty low penetration rate today of tires being bought online by consumers and our current strategy, right, we felt pretty compelled to go and partner with Amazon as we did with others. As it relates to Amazon, we won't comment specifically around why or how those particular programs are performing, Bret. But in general, I'll say this, right, we're still pleased with the relationship with Amazon as well as others. We can't give out any details of course, but in its entirety, we still believe supporting online installers gives us the opportunity to do 3 or 4 things: one is, drive incremental traffic to our stores; two, participate in the high value-added services that comes with installation, gives us the attachment rate. Now, I'll just reiterate what we've shared before as a general comment about the attachment rate and profitability, but our average ticket overall as a company is $160 plus. The average ticket that we see on a tire installation is north of $120. The nature of those services are dramatically different, of course. The $120 ticket is very high margin, high labor content. So, generally speaking, it's still early innings, but we still feel pretty good about the economics in line with what we see with the broader program. As I made comments in the prepared remarks, we currently stand at 400 stores with Amazon and we're going to look to partner with them over the calendar year here to expand that to all 1,200 stores of ours going forward.

And then one quick follow-up question, also on the M&A, are you seeing anything changing as far as valuation expectations? And as you're doing deals now, are the sellers expecting more?

No, I won't say really status quo, but we've seen -- quarter to quarter, it's been a pretty stable environment in terms of, let's say, valuations. But the activity, certainly for us, certainly has picked up in the last quarter in particular.

And I guess just on that topic, I mean, obviously since you've been there now for a bit over a year, the prior management team used to talk about 7 times , 8 times EBITDA or x percent of sales or replacement cost, what is your thought as far as expected valuation ranges on deals?

Yes, one thing that I don't want to do going forward is kind of signal what our valuation process is. But I think we can share with you, we typically see two turns to four turns of synergies whenever we acquire companies. And given the emphasis that we're placing on driving standardization and consistency in our stores, we feel like there's opportunities to expand those synergies going forward by driving not just cost synergies, but revenue synergies when we acquire companies.

Our next question comes from the line of Rick Nelson with Stephens Inc. Please proceed with question.

Brett, just to follow up on acquisitions and the pipeline, I'm curious if you're facing more competition these days for deals [indiscernible] 5 to 40 stores, so you could put some revenue brackets around that, that would be helpful, whether you're shopping primarily in northern markets or southern markets?

Let's talk first about maybe the markets. As you saw with our recent announcement, we've now entered Louisiana in our quest to continue to diversify our store footprint and target the Sunbelt, if you will, the growing demographic areas of our country. And look, we're going to continue to do that going forward. Related to competition, look, I would characterize really no change there; no more, no last, just status quo. Certainly, there's a number of players out there competing for deals. We still feel like Monro represents a great opportunity for owners to exit their business and to create opportunities for their people to grow and develop. We feel like we're a good credible buyer. And with the synergies I mentioned now that we would expect to see both on cost and top line, we feel like we're going to remain a real strong buyer going forward.

Perhaps a question for Brian on the tax rate, 15%, came in below where we were. When you talk about some of the one-timers involved there, how should we think about the tax rate in your March quarter and as we push into next year?

Yes, I think, in our guidance, we guided to a 22% rate for the year. And for next year, I would anticipate it to be a little bit north of that, just because we obviously won't have the benefit of the onetime item this year. So, I would expect that to be closer to the 24% that we had originally guided to this year.

And just to follow up on the January, I know you discussed the weather challenge really in the quarter changed for the back end of the quarter. Is there anything else in January that you think could be impacting that [Indiscernible] from some other retailers, maybe the government shut down had some impact in the first half. I'd like to get your commentary there.

Yes, good question, Rick. Maybe a couple of things. Look, I know, I always hate to talk about the weather and we tell our team that internally, we don't like to talk about the weather. But I will say we do monitor, we measure, we analyze weather and the correlation it does have on our business, and in particular our tire business. And as we talked about earlier, we did see maybe some demand pull in November, given the fact the snowfall came early year-on-year. That reversed itself in December. And certainly, the early part of January was softer from a weather point of view year-on-year. The other dynamic that we saw, I think, around the holiday was certainly some softness that maybe other retailers have talked about during the holiday season itself. And I would book in that around a couple of weeks leading into the holiday season and a couple of weeks leading out of, so we certainly saw a reversal and back to kind of mid-single digit normalcy for us in the second half of January. We have studied pretty significantly the government shutdown. Tough to determine, of course, in macro, the impact of that, given the dispersed nature of the employees everywhere. But we do have a pretty high concentration of stores, high-volume stores in the Washington D.C. area. And Brian, do you want to provide any color on that?

Yes. So, we looked at our stores in the Baltimore-D. C. area, which are primarily our Mr. Tire stores, and during the shutdown, while this isn't going to have a big needle mover on the consolidated entity, but what we did see though at the store level was, we saw some significant traffic and sales declines versus the benchmark, other parts of that geography as well as the chain -- the tire chain as well as the Company as a whole. So, it did have an impact on the stores and the operations in the greater D.C.-Baltimore area. But as you roll it all up, really not a large needle mover in total.

Thank you. Our next question comes from the line of Stephanie Benjamin with SunTrust Robinson Humphrey. Please proceed with your question.

I had -- first just as a quick clarification, when you spoke about the launch of the new operating procedures, is that -- you know, the educational selling approach, is that across just those 31 stores you refreshed or is that Company-wide that you launched those new procedures?

Yes. It's a good question, Stephanie. that was launched just across the 31 stores in Rochester. So, we wanted to pilot the procedures. We call it the playbook, by the way. So, regardless of what banner is on the outside of our building, whether it's a Mr. Tire, a Monro or a Tire Choice, the procedures that we execute in-store are going to be consistent across our 1,200 locations. So, we're piloting two things, one is the playbook and two is the actual re-imaging to the brand standards in Rochester, but it only happened in those first 31. The playbook will roll out at a much faster pace over the next couple of years than the re-image, just given the ease of execution there. But at this stage, right now, we're just at 31 stores with the new playbook.

And then, is there an opportunity, based on the results of these first 31 stores, or even as you kind of move to, like you said, re-imaging some of the newer -- newly acquired stores to really kind of accelerate the re-imagining or any of this? Or is it kind of set in that 3 to 5 year timeline?

I think, we're being pretty methodical about this, as you can tell. First step for us was to pilot it, and we're piloting for two reasons; one, just refine the procedures to where we can then get them to scale. The second thing is, we wanted to value engineer all the investments that we're making in the store, from fixtures to signage, et cetera. As I had made comments in our prepared remarks, we're in the process now of running request for proposals to leverage our scale now to do this across our portfolio, and that work is going to be completed by the end of this quarter. We'll then start up re-imagining in Q2. And I think Q2, how fast we move across the 70 stores we have planned -- excuse me, in our first quarter of next year, I should have said -- how well that goes will determine the pace from that point forward, that we'll determine. But at this stage, I think, it's still too new.

Thank you. Mr. Ponton, there are no further questions at this time. I'll turn the floor back to you for any final comments.

Okay. Thank you all for joining us today and for your continued interest and support of Monro. We are pleased with our solid year-to-date performance and the continued momentum of our Monro. Forward strategy. We are excited about the opportunities ahead of us and look forward to updating you all on our progress at year end. Have a great day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.