Monro, Inc. (MNRO) Q2 2020 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. And welcome to Monro, Inc.’s Earnings Conference Call for the Second Quarter Fiscal 2020. 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] And 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. 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 two, 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 statements included 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 are disappointed in our financial results in the second quarter, as our performance was significantly impacted by gross margin pressure related to higher tire and labor costs. However, we have quickly taken actions to improve our margin performance, which I will discuss in greater detail shortly. Positively, we are very pleased with the strong progress we have made on the execution of our Monro.Forward strategy. We have conviction in our path forward, but know that a transformation of this scale is rarely linear, which was reflected in our results. Although, this quarter was challenging, we have addressed the isolated issues we faced and are moving forward towards the strong opportunity ahead. We are very encouraged with the execution of our strategic initiatives, in particular our store refresh program, which we believe will be critical in enabling us to generate long-term sustainable growth. In addition to this important initiative, we have ramped our investments in technology to support our strategy and are well-positioned to capitalize on the increasing demand and evolving trends in our industry. Before I provide you with a deeper dive in our strategic progress, I will give a brief overview of our second quarter results. As illustrated on slide three, we posted flat comps in the second quarter, as higher year-over-year ticket was offset by negative traffic. From a monthly perspective, our comps were approximately up 1% in July, flat year-over-year in August and down 2% in September. We knew our comps were increasingly difficult as we move through the quarter compared to gains of 1%, 4% and 5% in last year’s July, August and September, respectively. In October of fiscal 2019, we posted comparable store sales growth of 7% and are currently tracking down approximately 1% against this tough comparison. Moving on to our performance by category in the second quarter, we were flat year-over-year in tire comparable store sales, has a 1% decline in tire volume was offset by higher ticket year-over-year. While were able to pass price on to customers with our Tier 1 tires, we were impacted by increased costs related to our more price sensitive tires. However, late in the second quarter, we saw retail pricing move up and become more reflective of the general industry pricing environment, a trend that has continued into October. We remain focused on driving strength in our largest category and have made important strides to position ourselves as a leader in the industry. This has been an ongoing journey, which began over a year ago, when we unbundled the price of our tires and installation online. I will provide more detail shortly on the technology investments we are making to drive unit volume and maximize pricing in this dynamic category. Turning to our service and repair categories, we saw 1% increase in brakes year-over-year. As you may recall late in the first quarter last year, we corrected our pricing after a suboptimal launch for Good-Better-Best packages, which drove significant strength in the category in the second quarter of fiscal 2019. We are pleased to have continued to drive growth in this category, despite lapping a tough comparison year-over-year. In our remaining categories, maintenance was up 1% year-over-year, while front end/shocks were flat and alignments declined slightly year-over-year. Geographically, our southern markets outperformed our northern markets stores. New stores added $17.5 million of revenue during the quarter, including $14.2 million from recent acquisitions. Turning to our gross margin performance during the quarter, we saw a decline of 140 basis points, primarily driven by higher material costs in our tire category, higher than expected labor costs and the impact from recent acquisitions. This margin impact drove the year-over-year decline we saw in our earnings per share, which did not meet our internal expectations. However, we believe our second quarter results represent a low watermark for us this year as we have moved quickly to drive margin improvement. As you know, our sales are dependent upon technicians to perform the services for our customers. We have invested in technician labor at our understaffed stores. However, our current store staffing process does not enable us to make quick changes to labor in response to fluctuating demand dynamics. This impacted our second quarter margins as we were unable to rapidly adjust our labor at stores where we were seeing a compression in demand. To rectify this in the near-term, we placed discipline controls on hiring, which we expect will normalize our labor costs in the back half of the year. In the medium-term, we are working to implement a cloud-based store staffing and scheduling model that will significantly improve staffing efficiency. Our new system will allow us to quickly and accurately rebalance the number of technicians and the level of skill sets in each store which will be critical in driving long-term margin expansion. With staffing and our day-to-day execution top of mine, I’d like to take a moment to welcome Rob Rajkowski, who recently joined Monro as our Chief Operating Officer. As we move deeper into our company transformation, we recognize the importance of operating effectively across our base and are thrilled to have Rob on our team to help us do just that. Rob has extensive experience in implementing operational excellence programs and his demonstrated leadership skills and strong track record will be critical as we continue integrating our operations, marketing, and merchandising functions, as well as executing on Monro.Forward strategy, which I’d like to turn to next on slide four. We made significant progress this quarter on our initiatives to improve the customer experience, most notably, our store refresh program. Like many retailers, our stores are the largest and most relevant marketing asset we have. Therefore, this initiative focuses on refreshing our stores to create a more consistent appearance, while also implementing standardized in-store operating procedures, which we call our Monro playbook. Additionally, we are rebranding in select stores to a tire-oriented banner where targeted demographics favor this type of store format. We believe this will optimize our brand awareness and increase our tire sales without sacrificing our service revenues. As we have mentioned previously, our tire stores generate approximately twice the annualized sales compared to service stores, reflecting the fact that tires make up a significant portion of the automotive aftermarket. We completed a pilot refresh program at 44 stores in the Rochester and Mid-Atlantic markets last year and began scaling the initiative to 43 stores in our southern markets during the first quarter of fiscal 2020. During the second quarter, we began and substantially completed the transformation of an additional 74 stores in four markets and also began work at 42 of our recently acquired California stores. This brought the total of stores in various stages of change this quarter to 159 stores. As you can see on slide five, our store refreshed program is an extensive seven step process that is implemented over the course of approximately 17 weeks. While we had expected this to cause some impact, the process of implementing our operational excellence initiatives, while also dealing with the construction and necessary updates to the appearance of these stores caused more disruption to the day-to-day execution than we had anticipated and resulted in 70-basis-point headwind to our comp sales in the quarter. The good news is we have finalized the transformation of the 43 stores we began in the first quarter and substantially completed the additional 74 stores in flight during the second quarter. Importantly, we have learned from our mistakes, which we are already being implemented into our go forward plans. In particular, we have streamlined our processes to a more targeted approach that will better prepare and support our teammates during the store transformation, which we believe will ensure the rollout is smoother moving forward. Turning to slide six, I would like to share with you the results of the stores that have completed the refresh program to-date, which we believe present a compelling case for why we are making the changes to store appearance and branding. Group one, which includes the pilot Rochester and mid-Atlantic stores, as well as group two, which includes the 43 stores that were completed in the second quarter are reporting double-digit comparable store sales growth year-over-year. Importantly, these results are in line with the forecast of our analytic model, which gives us confidence in the long-term contribution of our recently completed stores, as well as the expected benefit of our larger refresh program moving forward. During the second half of the year, we will finalize the refresh of group three, which includes the 74 stores that we substantially completed during the second quarter and our 42 recently acquired California locations, where we began implementing our standardized operating procedures late in the second quarter. As previously mentioned, the California stores will be rebranded under our Tire Choice Auto Service Centers banner to drive higher awareness for tires, while maintaining our service focus. As you can see on slide seven, we provided a timeline of our refresh program over the next year and a half. We believe it is important to take a measured approach to the rollout of this initiative and while we will work to minimize the disruption as much as possible, we are still moving full steam ahead albeit setting a limit of 60 to 80 stores per quarter. The group of stores that we have prioritized over the next few quarters, include our newly acquired stores in targeted markets where our analytics model has indicated the strongest potential for increased visibility and traction of our tire banners in order to achieve what we expect will be the highest possible returns. Turning to slide eight, I want to take a moment to highlight some of the technology investments we are making that we believe will be instrumental in creating a scalable platform capable of sustainable growth. When we began our transformation and there were significant work that needed to be done to get our infrastructure up to speed. First, we implemented foundational tools to drive efficiency in our stores and field management organization, which we have continued to expand across our company. We are also in the process of implementing a new store network infrastructure upgrade to better facilitate customer facing technology, which thus far has been rolled out to approximately 10% of our store base. This new updated network will be critical, as we rollout our digital phone system towards the end of the year. Additionally, to support our teammates, we have introduced the Monroe University platform that will be piloting our cloud base for staffing and scheduling model by the end of the fiscal year. To continue to strengthen our merchandising strategy, we will introduce a tire category management and dynamic pricing system. And finally, we are piloting a cloud-based car inspection tool which is state-of-the-art technology to better support our technician and customer needs. These investments span across all areas of our business and will be critical to our future success. We expect the rollout of these initiatives to be completed by the end of fiscal 2021. Turning to slide nine and the remainder of our Monro.Forward initiatives, while we roll out our store refresh program, we have maintained a focus on improving our customer satisfaction ratings and online reputation, which resulted in our average 4.7 star rating during the second quarter, bringing our all-time average star already into 4.5 stars, up significantly from 3.6 stars before the program launched. We will continue to leverage the feedback we received to drive ongoing operational improvements with the goal of delivering a consistent 5 star experience in each of our stores. Turning to our initiatives to enhance our customer-centric engagement, consistent with prior quarters, we are making strides in our customer retention and acquisition efforts by leveraging data driven analytics to meet our current and future customers where they are. Additionally, our improved retail websites have continued to drive notable increases in consumer online actions including clicks to call, driving directions and appointment requests both year-over-year and sequentially. As we discussed last quarter, we are in the process of implementing a new digital phone system, which represents a significant step in improving our network infrastructure and customer communications. This system will help drive consistency in our phone strategy by providing an improved visibility and allowing us to better track our customer execution on the phone. We have begun the initial testing phase of this technology and will roll it out to our recently refreshed stores before expanding it to our entire store base over the second half of the fiscal year. This system will support our larger marketing initiatives and ensure we are driving a better experience for our customers. On our partnership with Amazon.com, we are pleased with the smooth rollout of this collaboration at more than 800 stores across 21 states. We are continuing to see strong customer satisfaction metrics at these locations and look forward to expanding this collaboration across our portfolio. As we look at the remainder of our customer-centric initiatives, we have made a decision to push back the second phase for our omnichannel strategy in order to focus on executing our category management and store staffing initiatives, both of which will help drive margin improvement. We now expect to implement the second phase of our omnichannel strategy, including offering our customers the option to view and purchase tires online and schedule an appointment for in-store installation during fiscal 2021. Turning to our strategy to optimize our product and service offering beginning with our category management initiatives. As I mentioned previously, during the quarter, our gross margin was pressured to an increased material costs and the impact of product mix in our tire category. As we had mentioned previously, we are focused on optimizing our tire assortment, and, therefore, in the fourth quarter, we will begin to implement a new pricing software that will be critical in providing improved visibility into our pricing strategy. This tool will enable us to better optimize our assortment mix which we expect will drive future margin improvement. In addition, we continue to see strong performance of our Good-Better-Best merchandising strategy. As I noted earlier, while we launched these packages in the first quarter of fiscal 2019, it wasn’t until the second quarter that we realized the full benefits. Therefore, the comparables this quarter were more difficult and we are pleased that still achieved growth in this high demand category. Importantly, we introduced three new service packages towards the end of the second quarter, which we expect will help drive stronger in-store conversion during the back half of the year. Our merchant strategy has taken hold and we look forward to focusing on improving traffic across our store base to drive long-term, sustainable, comparable store sales. Now, I’d like to provide an update on our productivity and team engagement initiatives. As previously mentioned, we are laser focused on the rollout of our cloud-based store scheduling model pilot by year-end. Additionally, improving our team engagement and productivity remains a key priority. We have expanded the curriculum in Monro University, our cloud-based training program and we began the process of rolling it out across our store base. This platform will be critical in enhancing our value proposition for our teammates and we expect it will help us drive continued improvement in our job satisfaction and engagement rates. This meaningful commitment to retaining our talent is driving real results and we are pleased to post that lowest year-to-date turnover levels since fiscal 2016, despite the robust labor market. Moving on to slide 10, as we continue to implement our strategy, we have remained focused on executing on attractive acquisition opportunities and are pleased to announce today that we have signed definitive agreements to acquire three companies, one with 14 locations in Las Vegas, Nevada and four in Boise, Idaho, and two companies that include nine stores in Northern California. The acquisitions of these locations further demonstrate the execution of our strategy to extend our footprint to this dynamic region. Importantly, by solidifying our growing presence on the West Coast, we enhanced our ability to service national accounts and also better position ourselves to capitalize on a high concentration of vehicles in this market and the potential long-term consumer shift to ride sharing. The acquisition in Nevada and Idaho, which are new states in Monro is expected to add approximately $20 million in annualized sales, represented a sales mix of 75% service and 25% tires. The acquisitions in California complemented our recent entrance into the state and are expected to add approximately $25 million in annualized sales, represented sales mix of 55% service and 45% tires. These accusations are expected to close in the third quarter of fiscal 2020 and to be breakeven to diluted earnings per share in fiscal 2020. Additionally, we closed our previously announced acquisition of eight locations in Louisiana. We now have 20 store locations in this state further solidifying our position recently entered market and increasing our exposure in the south. These locations are expected to add approximately $12 million in annualized sales, represent a sales mix of 50% service and 50% tires, and be breakeven to diluted earnings per share in fiscal 2020. Overall, acquisitions announced and completed in fiscal 2020 collectively represent and expected $120 million in annualized sales. We remain well-positioned to continue to execute on a robust pipeline of attractive M&A opportunities, and currently, we have over 10 NDA signed with opportunities ranging from five to 40 stores. We believe these opportunities will allow us to maintain our leadership position in the markets we serve, while continuing to expand our geographic footprint into attractive and underdeveloped regions. Importantly, we believe that the implementation of our Monro.Forward initiatives to standardize our in-store operating procedures and brand standards will position us to more effectively and efficiently integrate our acquisitions. Lastly, we opened five greenfield locations during the second quarter, bringing our total greenfield store openings to six in fiscal 2020. In conclusion, while our performance this quarter was challenged, we are firmly committed to our Monro.Forward strategy and are confident in our path forward. By executing our initiatives and completing our transformation, we will drive future strength in our business and create a sustainable platform for long-term growth. Importantly, I’d like to thank our teammates for their effort as we implement our strategy and our customers and shareholders for their ongoing support. With that, I will turn the call over to Brian who will provide additional detail on our second quarter financial performance and fiscal 2020 outlook. Brian D’Ambrosia: Thank you, Brett, and good morning, everybody. Turning to slide 11 in our performance during the quarter. Sales increased 5.5% year-over-year to $324.1 million, driven by sales from new stores of $17.5 million, including $14.2 million from recent acquisitions, partially offset by a decrease in sales from closed stores of approximately $0.8 million. Same-store sales in the quarter were flat year-over-year. The second quarter fiscal 2020 had 91 selling days in line with the previous year period. Gross margin decreased 140 basis points to 37.7% in the second quarter of fiscal 2020 from 39.1% in the prior-year period for the reasons Brett mentioned previously. Operating expenses for the quarter increased $3.3 million to $88.7 million or 27.4% of sales, as compared with $85.4 million or 27.8% of sales for the prior year period. The year-over-year dollar increase includes expenses from 84 net new stores. Our operating income for the second quarter was $33.4 million, which increased by 3.3%, as compared to operating income of $34.5 million for the same quarter last year and decreased as a percentage of sales from 11.2% to 10.3%. Net interest expense for the second quarter increased $0.2 million to $7 million, as compared to $6.8 million in the same period last year. The weighted average debt outstanding for the second quarter of fiscal 2020 increased by approximately $50 million as compared to the prior year period. The increase is primarily related to an increase in finance lease debt recorded in connection with our fiscal 2020 acquisitions and greenfield expansion, as well as an increase in debt outstanding under our revolving credit facility to fund the purchase of our acquisitions. The weighted average interest rate for the second quarter decreased by approximately 60 basis points year-over-year largely due to lower LIBOR and prime interest rates, as well as lower borrowing rates associated with new leases. Our effective tax rate was 23.6% for the second quarter, compared to 22.2% for the same period last year. Net income for the second quarter was $20.3 million, compared to $21.8 million in the prior year period. Diluted earnings per share were $0.60, compared to $0.65 in the prior year period, which included $0.02 per share and onetime costs related to Monro forward investments. Lastly, we opened five greenfield locations during the second quarter. As a reminder, greenfield stores include new construction, as well as the acquisition of one to four store operations. These locations are expected to add approximately $1 million each in annual sales. As of September 28, 2019, the company had 1,262 company-operated stores and 98 franchise locations, as compared with 1,178 company-operated stores and 97 franchise locations as of September 29, 2018. During the quarter, we had a 13 company-operated stores and closed two. Turning to slide 12, we continue to maintain our disciplined approach to capital allocation as we execute our growth strategy. Our capital expenditures were $23.8 million in the first six months of fiscal 2020, of which, approximately $5 million was related to investments in our Monro.Forward initiatives. We are pleased with the progress of our Monro.Forward strategy and we continue to expect an incremental $75 million in capital expenditures above our normal run rate over five years to support investments in store reimage and technology. Additionally, accretive acquisition opportunities remain a critical pillar of our growth strategy. During the first six months of the year, we spent approximately $65 million on acquisitions, including one to four store acquisitions completed as part of our greenfield expansion strategy. We are also committed to returning capital to shareholders through our dividend program and paid approximately $14.8 million in dividends in the first half of fiscal 2020. Finally, we remain focused on maintaining a solid balance sheet with ample flexibility to support our strategic initiatives. We ended the second quarter with strong leverage ratios and have ample room under our financial covenants. We generated approximately $78.9 million of cash flow from operating activities during the first six month of fiscal 2020 and debt under our revolver increased by approximately $31 million. Now turning to our outlook for fiscal 2020 on slide 13, we have updated our fiscal 2020 comparable store sales guidance range to 1% to 2% to reflect the impact of our second quarter performance. However, our revised guidance assumes improving comparable store sales growth in the second half of the year as initially contemplated in our previous guidance, which called for an increase of 1% to 3%. Based on the updated comparable store sales guidance, any contribution from today’s announced acquisitions we now anticipate fiscal 2020 sales to be in the range of $1,295 billion to $1,315 billion, an increase of 7.9% to 9.6% as compared to fiscal 2019 sales. This compares to the previous sales guidance range of $1,285 billion to $1,315 billion. Our guidance assumes relatively stable overall tire and oil costs for the balance of fiscal 2020. Based on these assumptions, we expect to generate earnings growth at our comparable store sales increase above approximately 1%. Given the impact of our second quarter performance, we expect fiscal 2020 earnings per diluted share to be in the range of $2.45 to $2.55, representing growth of 3.4% to 7.7% -- 7.6% year-over-year. At the midpoint, this guidance implies diluted earnings per share of $1.24 in the second half of fiscal 2020, an increase of 11.7%, as compared to $1.11 in the second half of fiscal 2019. This compares to the previous full year guidance of $2.55 to $2.75. Our earnings per share guidance include approximately $0.03 to $0.05 in accretion from fiscal 2019 acquisitions. Acquisitions announced and completed in fiscal 2020 are expected to be breakeven to earnings per diluted share during the year. At the midpoint of our guidance range, we expect an operating margin of approximately 10.6%, interest expense to be approximately $29 million, depreciation and amortization to be approximately $65 million and EBITDA to be approximately $205 million. We expect capital expenditures to be approximately $65 million this year. This guidance reflects an effective tax rate of approximately 23.5% and is based on $34 million diluted weighted average shares outstanding. As always, our guidance does not assume any future acquisitions or greenfield store openings. I will now turn it back over to Brett to provide some closing remarks before we move to Q&A.

Thanks, Brian. In summary, while our financial performance this quarter was challenged primarily due to gross margin pressure, we firmly believe the changes we are making across our business are positioning us for sustainable future growth. We made significant progress on our store refresh program and the strong performance that our pilot stores underscores our confidence in our strategy. Additionally, we acted quickly to improve our margins in the near term and we are focused on implementing critical category management and store staffing tools that allow us to drive strong margin performance moving forward. Importantly, we continue to execute on attractive acquisition opportunities and are further expanding our geographic footprint into the West Coast. Looking ahead, while we have upgraded our expectations for the full year, we are confident in our strategy and the long-term outlook for our business. With that, I will now turn the call over to the operator for questions.

Thank you. [Operator Instructions] Thank you. Our first question comes from Brian Nagel with Oppenheimer. Please proceed with your question.

Hey. Good morning. It’s David Bellinger on for Brian. My question is on the…

Hey, David.

Hey, guys. My question is on the gross margin side. So you mentioned some of the actions you are taking to address the higher material and labor cost in Q2 and understanding it’s a fluid situation. So what’s the expected timeframe to work through some of these initiatives, what’s baked into your guidance at this point in terms of gross margins in Q3 and Q4?

Yeah. Good question. This is Brett. I will take the first part and ask Brian to add some color. So let’s bifurcate the discussion into tires and labor. So on the tire front, let me provide some strategic context here. As we have discussed on previous calls, we have been working, over the past 18 months, on improving our price competitiveness on tires, starting with unbundling installation for the price of the tire. In addition, we implemented a more localized pricing strategy that establishes more localized prices reflective of the competitive set in that market we compete in. Over the past six months, we have been working to implement a pricing strategy that improves, I would say, our overall attractiveness to all consumer segments, including price sensitive consumers. Late last year, there were some tire manufacturer price increases that were -- we were successful in delaying into the middle part of this year and given our inventory turns, we started to experience some cost pressure in this particular quarter Q2. To provide a little more context on how we think about tires, we segment our tires into three tiers. You have Tier 1 branded tires, Tier 2 mid-branded tires and Tier 3 opening price point tires. So within the quarter in particular, we saw our ability to take price and pass price through on Tier 1 branded tires pretty effectively, but throughout Q2, we didn’t see the same ability early part of the quarter on passing price through on opening price point tires, as those consumers are a bit more price sensitive. Having said that, we did see that correct itself the latter part of Q2 and our exit rate into October of Q3 or into Q3, saw considerable margin improvement namely on the opening price point tires that create the pressure for us in that quarter. Turning to labor, a similar dynamic, we -- as I commented in my prepared remarks, labor in our service model is essential to driving sales. We try to equip our store managers with the ability every day to say, yes, to consumers, whether it’s a late oil change or every phone call to be in a position to take those cars in, have an assurance that they have the adequate labor to do that work and deliver a good experience for those consumers. We have systematically been investing in labor in some stores that have historically been understaffed. That trend continued into the early part of the quarter. We were expecting a little stronger comp sale performance in Q2 and as we got deeper into Q2 and didn’t see the comp sales performance that we expected. We were exposed from a labor point of view as we didn’t dynamically adjust our labor to reflect the new level of demand deeper in the second half of the quarter. We subsequently corrected that exiting the quarter going into October and feel like we are in a better position now entering Q3 to manage our labor more effectively that will continue into the second half of the year. And one last thing, I will just underscore the importance of that and Rob Rajkowski to our team as head of operations, who will be intimately engaged in managing day-to-day operations around labor management and margin management. I will turn to Brian to comment on the outlook. Brian D’Ambrosia: Yeah. In the second half of the year we are expecting 40 basis points of margin improvement at the midpoint of our guidance range. Expect that to probably build in as we move through Q3 and Q4.

Got it. That’s all very helpful. And then if I could just switch on onto the comp sales outlook. So you mentioned, October down 1% to-date and your updated guidance implies comps something close to positive 1% to 3% or so for the back half of the year. Can you just walk us through the progression relative to what we have seen over the last few quarters and how much of the expected improvement should be driven from your store refresh program?

Yeah. So the back half comp improvement is expected as we really move through the quarter here. As we talked about, we are up against a pretty strong October up 7% last year. We feel good about hanging in there, being down 1% October to-date against that dynamic. That was really driven by some early snowfall in the Northeast last year that brought tire strength in October that continued in November with an up 7% in November. So we feel good right now about where we stand against that, kind of, on a like-for-like basis because we haven’t gotten that weather yet this year in October and we are kind of holding our own there. But being down 6% in December, as we talked about last year, that represents our biggest opportunity and particularly as we move into January, being down 2% and at that end Q4 being only up 0.5% in the quarter. So we think that that range that you just outlined, well, the implied range in the back half is very achievable based on those dynamics. As well as, you mentioned the continued ramping of our store refresh contribution at those double-digit comp sales improvements.

Got it. Thank you very much.

Thank you.

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

Hey. Good morning, guys.

Hi. Brian D’Ambrosia: Good morning, Bret.

Hey. Question on the labor issue, I guess, is it staffing hours or is it level of technician that’s driving the cost, I guess, do you have too many A tax and too much C labor still or is it just a matter of too many of labor hours in the store versus the traffic?

Yeah. It’s actually both right now, Bret. I think, near-term we are addressing staffing levels both headcount and hours worked. But long-term we still see the opportunity to balance our labor, gain the right mix of technicians with the appropriate skill level and corresponding wage rate that lines up with the level of services that are performed. Given the fact that we are managing over 8,000 technicians in our business today, that underscores I think the importance of the store staffing and scheduling system that we have teed up for pilot by year end. That gives us the ability to really have much stronger and better visibility and to staffing mix and really provide us with that dynamic ability to balance hours relative to demand and equally important give management at all levels of the organization the ability to oversee that and manage that real time.

Okay. And then a question, I guess, when you think regionally, obviously a big push on to the West Coast now and you have filled out a lot of the Southeast, what’s the margin profile as you buy into these markets where you don’t have a lot of distribution infrastructure. I guess are you thinking about putting a D.C. into the southern markets and when we think about our cost of goods out west where you are buying parts and or tires from third parties, how’s the margin spread in that market versus your average?

Yeah. So in the first year of an acquisition, kind of regardless of the distribution strategy, there’s always pressure at gross margin and operating margin level where we are getting our inventory installed, working through seller’s inventory, making sure we got the proper staffing model for our business and we get -- that’s one of the primary reasons why we tend to be breakeven in year one as well as the associated deal costs. As you think about the Southeast and the West Coast that don’t have distribution. There certainly are some unrealized synergies still on the table there. We do have distribution through the Riverside warehouse in the southeast, but, I am sorry, on the West Coast but it takes time for us to kind of fully realize the benefits of that D.C. as we kind of get inventory and get our distribution routes set up. But we feel good about that location being able support our current store base there and as we expand we will look to expand distribution outlets. Brian D’Ambrosia: Maybe just to add some color on that, Bret. In addition, given our TIRES NOW brand on wholesale, our go forward strategy is to not necessarily open up pure cost centers or distribution centers, but as we look to open up locations, say, in an under-served area like Florida, it would likely be through a TIRES NOW profit generating distribution location versus cost center. So I think it’s fair to say right now our focus is on building out the infrastructure on the West Coast versus adding those locations right now in Florida.

Okay. Would that certified D.C. in Riverside be able to ship to Vegas or Idaho, I guess, Vegas?

Yeah. Clearly, good access to Las Vegas, which is a nice extension of Southern Cal as you know. So we feel very good about our ability to service that market. The Ford [ph] locations up in Boise will likely be serviced through secondary distribution, but for the most part our concentration in the stores that we have acquired there will all be served through Riverside.

Okay. Great. Thank you.

Thank you. Our next question comes from Rick Nelson with Stephens. Please proceed with your question.

Thanks. Good morning, Brett.

Hi, Rick.

Update us on what you are seeing with the Amazon install program?

Yeah. So as we commented in the prepared remarks, Rick, I think we continue to see good customer satisfaction ratings from Amazon. They are clearly pleased with our performances, our online installer for them. We haven’t commented specifically about the economics, other than the fact that consistent with what we have seen with all online tire sellers and our relationships with them, we still see this as an accretive strategy for us to drive incremental traffic to our stores, incremental margin in effect of doing that driving down our cost to acquire customers as a result of that. So nothing that we have seen significantly changes our course or desire to continue to partner with people such as Amazon and other online retailers, probably our delay in rolling out to the balance of our stores is less about our satisfaction with the program and more about our organizational capability and our focus on other key initiatives right now that at this current stage are maybe a little higher priority for us as a company.

Okay. Thanks. I’d like to ask you also about the competitive environment in tires and Amazon specifically their pricing looks pretty aggressive. And I noticed your tire related categories were weaker than the rest of the store. Do you think they are making inroads into the industry?

Yeah. I think pricing is always hyper local, right? At a very localized level, pricing is important. I think we just back up and share with you what our strategy has been. Again, we believe being very competitive online is critical to our success with tires long-term given tires lend themselves to be shopped by consumers and for all the reasons you had mentioned. We systematically been improving our price competitiveness, primarily, I would say on the bottom half of our product offering, which lines up against consumers that are very price sensitive, as you might expect. So we have been systematically reducing, I would say, our gap to market over the past 12 months, 18 months and feel very good about our relative positioning versus, I would say, primarily brick-and-mortar retailers as their primary focus with a secondary on online. We certainly aren’t going to comment about Amazon’s performance and penetration in the category, other than we are pleased to be an installer for them and are still satisfied with the results of that program near-term.

All right. Can you comment on your tire units? What happened there from a same-store basis, the change and how that compares to the industry?

Yeah. Our units were -- just to back up, sequentially, our units were flat in Q1 and they were down slightly in Q2. But for the most part, I would say, the demand profile, what we saw is pretty consistent from Q1 to Q2 down slightly. We finished flat on the category as we commented about due to certainly the unit volume being down offset by positive price to the tune of 1%. As it relates to the industry, it’s a little tough to get a gauge given the fact most of the manufacturers report ship in data. But from our channel checks from what we have seen, I think, maybe an improving tire environment deeper in second quarter. But we feel like, I think, near-term our performance, Q2 in particular, we are probably in line with what we have heard from the industry.

Okay. Thanks for that. Finally, if I could ask you the margin improvement that you referred to of late, is that a sequential improvement or are you in fact expanding margins year-over-year? Brian D’Ambrosia: Certainly improving of our run rate that we experienced in Q2 and also starting to see some of the expansion that we would expect to build, and like I said earlier, to get us to that 0.4 -- 40 basis points for the second half.

Okay. Thanks and good luck, guys.

Thanks, Rick.

Thank you. Our next question is from Jonathan Lamers with BMO Capital Markets. Please proceed with your question.

Thank you and good morning.

Hi.

On the manufacturer tire price increases, we have seen a number of the Tier 1 manufacturers announce 5%, 6% increases in the list prices starting, I believe at the beginning of your fiscal Q3. Could you kind of describe what impact you expect that will have on your tire sales near-term and later over the next 12 months?

Yeah. You are right. There’s been a lot of public increases publicized by the tire manufacturers you stated. As you might expect those are all stated list price increases and the impact to us specifically depends upon the weighted average increase across the tire lines that we sell and given our program alignment with those respective manufacturers. Historically, we have been very good about leveraging our scale and being able to offset those increases in many cases with program enhancements behind the line and given our relative scale and volume that we have as a tire retailer. We feel like our ability to sustain that going forward is pretty good. Having said that, as we commented about, we are seeing some inflation in our business, we will likely continue to see I think inflation on Tier 1 brands moving up throughout the second half given those stated pricing increases for manufacturers, which probably in the near-term is also creates opportunity for us to possibly expand margin near-term, given that favorable pricing environment. I think the real opportunity for us is to improve our margin profile on Tier 2 and Tier 3 that we saw the pressure in Q2.

So could you just help us understand a little better how the margin is improving or is expected to improve in the back half on the tires? The -- like I understand on the Tier 2, and sorry, well, do you expect that your price changes on the Tier 2s and the Tier 3s will have a negative impact on volumes and demand?

No. We look systematically week to week this is a very dynamic process you might expect. And we have identified and started to see market moves in both Tier 2 tires as well as opening price point tires deep in the second quarter. We didn’t see that first part of the quarter. So we think the industry is catching up a little bit on taking price to the consumer and passing that through on both Tier 2 tires and opening price point that we didn’t see in Q2. That’s what we saw exiting Q2 heading into October that we are commenting about that gives us confidence in near-term margin expansion on tires that we expect to hold that for the second half.

Okay. And switching to the slide six where you laid out the performance that you have seen for the stores that have been refreshed. I am just curious, for your analytical model, does it tell you that you should expect improvement and the remaining refreshed stores that sort of consistent with this result that you have seen for the pilot stores, I know these were in some of your oldest markets.

Yeah. Jonathan, let me back up and give you some additional context. So, if you recall a year or so ago, we installed the analytics tool that gives us good visibility on our retail store portfolio. We have sales forecast for every store in our portfolio based upon consumer demographics and the system gives us the ability to do what if analytics on, what would happen or project what would happen from a sales forecast point of view based upon a brand change on that respected building. As we look at the pile of locations, we are very pleased with the performance in our comp sale improvement. And the headline sales number that we are seeing out of those locations are very much in line with the expected sales number common for those locations. So, from that, we then prioritize the markets in our go-forward groups based upon the markets that we felt would give us the biggest lift between projected sales from the model versus our current actual sales. And probably not surprising, the biggest group of those stores would reflect a conversion from a service store format to a tire store format as our tire store generally speaking generate twice the revenue than a service store format does. So as you look at the next three to four quarters, there’s a significant concentration of stores that are reflective of that format change that we are forecasting.

Thanks. And if I look at slide seven and add up the stores to be refreshed, it looks to be about 423 stores. Do you -- can you give us a sense for what portion of those include re-bannering to tire stores and should see the incremental lift on the tires -- from the tire sales in addition to the normal lift that you got from the stores just being re-imaged in terms of consumer demand? Brian D’Ambrosia: Yeah. So this is Brian. So if you with our Group 3 stores, the 116 stores there. There’s 42 in there that are the -- what you would call the acquisition stores or certified stores. Those are going under the Tire Choice banner so they are getting re-bannered but from the certified name onto the tire choice auto service name. They do have a high concentration of service sales currently, about 75/25. So we think that change will produce a very similar result in terms of protecting the service margins but driving additional tires there. The remaining 74 stores there, 67 service to tire rebrands and then seven are like-for-like Tire Choice format changes, so a good portion of that 116. As you start to move out into Group 4, 5 and 6, a much nearly 100% concentration of service to tire banners. We will be incrementally doing the Las Vegas stores, as well as the additional California stores. So those will be additive or replace as we move out some of those conversions. But Group 4, 5 and 6 as scheduled are primarily service with higher conversions.

Okay. And just to clarify on the store refreshes and the re-bannering, I was at least thinking of these as kind of two separate initiatives, like, Brett, when you make these comments that the incremental lift that we saw in Groups 1 and 2 of kind of 12%, 13%, call it, when you say that that’s reflective of the expectation for Group 3 for the next few quarters, would you say that like that 12%, 13%, does that -- would that include both the benefit of the reimaging and the brand -- the rebranding going forward?

Yes. It does. We didn’t parse out to look at Group 1. The pilot stores, 30 of the 42 locations would be what we would call reimage where we took the Monro Muffler Break and basically reimaged that to just a reimaged version of that service store format. The balance of the stores there were a format change from service to tires, and although, we are not going to parse because that will lead us to basically market-level performance, we don’t want to share that. I think it’s fair to say the rebranding drove above-average performance on comp sales and the reimage was less than average, but the midpoint when you combine those was about 14% increase in our comp sale performance year-on-year versus our run rate comp sales performance.

Thanks. One last question, if I may, do you have the breakout of the monthly comps in Q2? Brian D’Ambrosia: Yes. Q2 comps were, I am sorry, plus 1% in July, flat in August, and down 2% in September.

Thanks for your comments. Brian D’Ambrosia: Thank you.

Thank you. The next question is from Stephanie Benjamin with SunTrust. Please proceed with your question.

Hi. Good morning. I just wanted to kind of touch back on the updated guidance for the year and if maybe you could touch on or just kind of explain what is required to hit either the low end or what will happen to hit the low end or really what needs to kind of pull-through to meet the high end of those ranges, just kind of given the tough comps going forward and some of the other price increases that are going to come through on the tire side. So maybe as you were just kind of updating your guidance what you were thinking about as you kind of adjusted those ranges just at the low and the high end? Thanks.

Yeah. So, starting with sales, the second half implied comps to get to our 1 to 2 or about 1.5 to 3.5, so 2.5 at the midpoint. As we look at our second half, both on a two-year stack basis, but also as we move later into this quarter, we have the easier comps of the year. So that gives us confidence in that midpoint. Also we know that we are holding up very well quarter-to-date against a strong plus 7 comp. They also gives us confidence in our ability to continue to improve as the comps get easier. At the midpoint of the guidance range, really it’s just a function of the margin miss in Q2 coupled with the sales adjustment. So the margin miss in Q2 really, as well as the incremental sales from acquisition, that’s what’s causing the 10.6% operating margin midpoint that is implied at the $2.50 midpoint on EPS.

Thank you. Our next question comes from the line of Scott Stember with C.L. King. Please proceed with your question.

Good morning. Thanks for taking my questions.

Good morning, Scott. Brian D’Ambrosia: Hi, Scott.

Brett, yeah, I appreciate, definitely you are going up against tough comps last year. But you also mentioned when talking about the staffing issues and the headwinds you had on the expense front, that part of it was you were expecting stronger sales in the quarter that didn’t materialize, was there any area that you would point out, whether -- or any factor that could have caused that and in talking about that, maybe talk about the regions, North, the Southern regions and the Western regions, how they performed? Maybe we can get with that way?

Yeah. Maybe I will give you a little more color on our regional performance. So, we did comment in the prepared remarks that South outperformed the North and a higher concentration of our Group 2 stores that we reimaged in the quarter were in the Southern region and a portion of the Group 1 stores, they were performing really well we are also in the Southern region. So that created, I think, a tailwind in the South for us relatively speaking. In our Northern markets, we did more geographic concentration, our extreme Northeast markets performed better. We saw a weakness in our Midwestern markets in particular and part of our weakness on comp sales, certainly, was attributed to the 70 bps of comp sale headwind that we felt was attributed to the distraction that we had during the reimage as of high concentration of the stores, comp stores, we put through the reimage was based on those Midwestern markets. But generally speaking, I think, we expected a little stronger performance out of our comp sales and not surprising. But I am still optimistic going forward given the comp profile that we are up against in the second half, a better pricing environment that we are seeing on opening price point tires. We did take some service pricing as well deep in the quarter as well. So we feel like we got some inflationary tailwind heading into the second half as well versus what we saw in the first half of the year.

All right. And just a last question. Certainly back to both areas that were hitting the margin in the quarter. I know that you have talked about putting in some new software patches or some new programs that will help offset that whether it’s helping to better align the mix of employees at certain stores or related to tire pricing and make sure you have the right tires. But how long will that take, I know you have kind of answered broadly speaking when we could see the improvement. But just give us an idea of when these patches will be going into place so we have something to gauge, how things are getting there?

Yeah. Sure. No problem. I think first of all I just want to come back to say, look, we -- the software isn’t the ultimate solution that will help us enable managing this going forward. The solution that we put in place at the end of Q2 was tighter controls and better expectations and with the new COO on board with Rob and then the expectation is we are going to more tightly manage labor in particular going forward. But having said that I think just remind you on labor and scheduling. We currently today schedule our stores using paper. We have roughly 8,000 technicians in our stores. So no doubt we feel like there’s a technology solution here that’s going to help us better manage schedules, align staffing models to appropriate demand levels and also get our mix aligned. So the timing on that, Scott, it’s probably broader than just the patch. This is a completely new system that we are installing that requires integrations with our HR Information Systems to drive integration there. We are in the process of installing it now, and I would say, aligning the back office infrastructure to support that system. Our expectation is we will be in pilot by the end of this fiscal year with a rollout scheduled across all stores in FY ‘21. But again, this -- on labor this is going to require us to keep managing through more traditional measures near-term under Rob’s leadership, while we build the scalable technology solution that just makes that more dynamic going forward. And the same could be said on tire pricing. Tires is a very dynamic category. There’s over a 30,000 SKUs that we have in our assortment and requires very dynamic pricing decisions that requires really an enterprise solution that will allow us to really think through elasticity and balance better I think our desire to drive volume and also protect margin, and the system that we are installing there will also be live and operational by year end as well. Now the ramp on that in terms of effectiveness should be virtually immediately. We will put that in place in a pilot market, of course, but we can scale that pretty quickly because there is no direct store involvement in that rollout, we can do it centrally and impact the pricing centrally for all of our locations, so a little easier to implement that going forward.

All right. That’s all I have. Thank you.

Thanks, Scott.

Thank you. We have reached the end of our question-and-answer session. So I would like to pass the floor back over to Mr. Ponton for any additional concluding comments.

Thank you, all, for joining us today and for your interest and support in Monro. We remain committed to our strategy and are pleased with the important accomplishments we have made this far. We are excited about the opportunities ahead and look forward updating you all on our continued progress next quarter. Have a great day.

Ladies and gentlemen, this does conclude today’s teleconference. Again, we thank you for your participation. And you may disconnect your lines at this time.