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…

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…

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.