Good morning ladies and gentlemen and welcome to the Monro, Inc.'s Earnings Conference Call to the Third Quarter Fiscal 2020. [Operator Instructions] As a reminder ladies and gentlemen, this conference 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. Thank you 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/investors/investors 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 statements include a discussion of certain non-GAAP financial measures, which are intended to supplement and not be substitutes for comparable GAAP measures. Reconciliations of such supplemental information to the comparable GAAP measures will be included as part of today's presentation and in our earnings release. With that, I'd like to turn the call over to our President and Chief Executive Officer, Brett Ponton. Brett?

Thank you Maureen, and good morning everyone. Thanks for joining us. I'll get started today with a brief overview of our third quarter results followed by an update on the progress we've made on our Monroe forward strategy. As illustrated on Slide 3, we reported comps down 0.9% in the third quarter as higher year-over-year ticket was offset by negative traffic. In October and the beginning of November, we performed well against difficult comparisons in the prior year. Mild weather conditions towards the end of November and in December caused the slowdown across our core northern markets. These conditions have continued into January with our comparable store sales down 4% during the month. We do not like talking about the weather. However, it is impossible to ignore the impact it has on our business. While we are not satisfied with our financial results this quarter, we are executing well against the areas within our control. In particular, we continue to move deeper into our company transformation and are confident we are on the right path. We are committed to making the necessary changes across the organization to position us to deliver strong results, no matter the external circumstances. Moving on to our performance by category in the third quarter, we were down 1% year-over-year in tire comparable store sales as higher ticket year-over-year was offset by a decline in tire volume. We experienced more normalized retail pricing this quarter and are focused on further refining our tire strategy to drive strength in our largest category. Importantly, we're on track to roll out our tire category management and pricing system beginning in the first quarter of fiscal 2021, which will enable a more dynamic and sophisticated approach to real time pricing. I'll provide more details on this shortly. Turning to our…

Thank you, Brett and good morning everyone. Turning to Slide 8 and our performance during the quarter, sales increased 6.2% year-over-year to $329.3 million, driven by sales from new stores of $22.7 million including $20.7 million from recent acquisition, partially offset by a decrease in sales from closed stores of approximately $0.8 million. Same-store sales in the quarter were down 0.9% year-over-year. The third quarter of fiscal 2020 had 89 selling days in line with the previous year period. Gross margin decreased 20 basis points to 37.8% in the third quarter of fiscal 2020 from 38% in the prior year period. This decrease was partially due to an increase in distribution and occupancy costs as a percentage of sales as we lost leverage on these largely fixed costs with lower comparable store sales. However as Brett mentioned, we saw improvements in our variable margin driven by lower material costs as a percentage of sales. Operating expenses for the quarter increased $5.5 million to $92.8 million or 28.2% of sales as compared with $87.3 million or 28.1% of sales for the prior year period. The year-over-year dollar increase includes expenses from 103 net new stores. Our operating income for the third quarter was $31.6 million, which increased by 2.8% as compared to operating income of $30.7 million for the same quarter last year, and decreased as a percentage of sales from 9.9% to 9.6%. Not interest expense for the third 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 third quarter of fiscal 2020 increased, by approximately $112 million as compared to the prior year period. The increase is primarily related to an increase in financing lease debt recorded in connection with our fiscal 2020…

Thanks Brian. We are making solid strides in the execution of our Monro Forward strategy in particular our store rebrand and reimage initiative. The strong results of the locations that have completed this transformation underscore our confidence in this initiative. The store rebrand and reimage program is further supported by our technological investments which we believe will help drive long-term margin expansion. In summary, we remain committed to driving the necessary changes to improve our business making the appropriate course corrections when necessary and executing well against the areas within our control. We are excited for our future and look forward to capitalizing on the attractive opportunities ahead. With that I will now turn the call over to the operator for questions.

[Operator Instructions] Our first question is coming from Brian Nagel of Oppenheimer. Please go ahead.

So I want to focus. I apologize for focused on the weather here. But I do just want to dive a little deeper into sales trends in the quarter. So Brett you mentioned, I think Brian that you did to in your prepared comments just you made some commentary suggesting that to the degree to which weather impacted the business. I was wondering if you can drill down a little further and say what that negative 0.9% comp would have been had the weather cooperated? And some of the other metrics you're seeing that really suggests the underlying business is trending better than what we saw in the weather affected fiscal Q3?

Yes, I'll take the first part and I'll let Brian take the second part of the question Brian. When we look at the performance in the quarter as we talked about our northern markets certainly underperformed the southern markets and give you a little more granularity on that certainly our stores up in the Northeast and the Midwest were where you would expect to have more exposure to weather conditions like you have in the Northeast certainly underperform. I think it's difficult to say what we would have done. Certainly I think we're expecting positive comps in the quarter. Our internal expectations would have been closer to plus one to plus one and a half assuming normalized weather conditions that we have seen in the past. We felt really good coming out of October and November given the strength of last year's performance that we are comping against. And didn't get the cooperation from the weather in December that we were certainly expecting. Because I think the comments in my prepared remarks we certainly don't like talking about the weather Brian but we can't ignore the fact that when 50%] f our business is tires. And we have a high concentration of stores in the Northeast and Midwest, we are going to have outsized exposure to our comp performance. Brian would you mind maybe restating the second part of your question?

Well I think - look I think you covered right, maybe I'll just bounce a follow-up question if I could. So the guidance - the adjusted guidance and you mentioned so in January you were - did I think a negative four. Now if I'm doing the math it looks as though that the adjusted guidance would suggest some type of pickup then in business in February and March. I guess the first question is that assumption correct? And then the follow-on question is I know we've seen this before with your business but at what point does because we still have a lot - we have potentially a long time in the winter. The weather could still come but is there a point at which in the quarter where the weather just comes too late?

Yes. So Brian your assumption is correct. Regarding the implied comps. So if you think about Q4 at the midpoint of let's say down 0.5 for the full year down 0.5%, that implies Q4 of down 2% which would be about February and March being down 1% in order to get to that down 2%. So that's the dynamic at the midpoint. So there is an expectation of a pickup in February and March.

And Brian maybe just to comment on the second part. As we get deeper into the fourth quarter, our fourth quarter and the second half of the quarter in particular I think we become less sensitive to the weather as you transition out of say pure winter conditions into spring. Certainly I think the later in the quarter you get snowfall certainly doesn't have the same impact on tire demand but you would find in our business that we got snowfall in October or November. Consumers are pretty tricky with their money. And I believe you get snowfall late in the season. They have a tendency to forego that purchase and push it out until next season in particular. The other thing to call out as well is, if you look at our historic performance at the company, December and January have always been the most volatile months but we had to contend with. And I think what we've seen in past performance here trends coming out of December January don't necessarily reflect what you see in the spring months. So given the mild December January heading into the balance of the quarter, we feel pretty good about the guidance range that we provided. As Brian said, our midpoint assumes that on the low end of our comp sales guidance that assumes run rate coming out of January which we certainly believe we're going to be better than that as we roll into FY '21.

Our next question is coming from Jonathan Lamers of BMO Capital Markets.

Brett looking at your slide on the store rebranding, the 18% performance of the rebranded stores I think is good. I'm curious from your analytics model how many years should it take a rebranded store to reach projected run rate sales.

So if you look at the top quadrant of that slide Jonathan, we've shared with investors the fact that our service stores do roughly $600,000 in revenue and our tire stores do $1.2 billion. So in the case where we're rebranding the service story you're working off a base on average of $600,000 and if we've seen I'll call it double-digit comp improvement off of that base you can get to an implied number certainly on how fast or how long it would take to ramp to the full maturity equaling the average sales performance of our tire branded stores. And that's one of the things that's encouraging about the strategy for us is not that it's just a onetime step-up in sales. This creates the opportunity to create multiple years of sustainable growth as our brand and our positioning our brand-related tires starts to mature. Keep in mind the tire purchase cycle with consumers is anywhere from two to four years. So if we rebrand right before a consumer made that decision to buy tires, we won't be relevant necessarily that consumer for two to three years out. So to put that in a time line that you're looking at three to five years to certainly mature out to average sales performance of the tire branded store.

So just to circle up on that for the stores where you're rebranding. There's nothing about their market. Like you would expect that those stores would have sales comparable to your existing tire brand stores of the $1.2 million is that correct?

Yes as a general statement that's correct. I think certainly you're going to have markets that will exceed the average and you'll have some markets that will be lower than that. And that's part of the choices that we make is in the analytic model. But on average as we look across our - I'll say the opportunity stores that be in the 555, I think we feel very comfortable on average that we can reach the full potential of the 1.2 over time as they mature.

Switching gears, Brian how much of a headwind to that revenue from acquisitions where the conversions of the 42 California stores this quarter?

Yes. I mean we had some disruption there. I would say we haven't really quantified that from a sales standpoint. But that's a great point Jonathan in that we have immediately put the new stores that we acquire on the Monro playbook and then shortly thereafter in this case about six months get the reimage in-store brand standards in place. So in Q3 the 42 California stores went through that. And they're substantially through that as of the end of Q3. But we haven't quantified it but it certainly had some impact on their sales performance in the quarter.

And that $1.8 million charge from Monro Forward initiative this quarter what was that for?

Yes, it was all related to the store rebrand and reimage. And it falls into three primary buckets related to that. The first is non-capital items that we send to the stores. So as we think about updated, safety chains updated, day banners, updated point of sale marketing materials, all of these things to get the store initially to the standard that are not capital, in terms of the actual work and construction done on the store that's the first bucket. The second bucket is non-capital work that's actually done. We get into these stores and we identify non-capital repairs, demolition, as well as some of the fixed verse replace items. For example, stripping a floor and redoing a floor versus installing a new floor. Those are things that make sense economically, but you get different treatment from expense versus capital for. So that's the second bucket. And the third is just right off of existing lease holes in the stores, anything from counters to maybe some existing signage that was put off as part of an acquisition when we initially branded the stores over to a Monro brand. Those are the three primary buckets that the Monro forward initiative costs consist of.

Our next question is coming from Bret Jordan of Jefferies. Please go ahead.

Back to Slide 5. I guess if we look at the 18% growth and rebranded stores, if we really so look at the comparable growth there ex the new product lines you're adding how is the service comp against the service comp in those stores. Are you seeing a pickup as you changed the brand?

Yes, maybe just to clarify though, Bret, I think we're actually not adding any new products to the service menu.

Right, but you're adding tires to the stores right?

Yes, just mix right. So - even our service stores they sell tires it's only 15% of their mix. So we're certainly seeing growth more outsized growth in their tire sales and we've had success in maintaining the rate of growth that we've seen on the service side which has been part of our thesis is hold on to the service business that we've enjoyed that's high margin. And then add to that more relevancy to the marketplace on tires and drive the growth through the tire category. We're seeing growth on both sides.

And I guess we look at the reimage how does that compare to comparable service stores in the network that hadn't been reimaged. I guess sort of looking at it again sort of apples-to-apples against the old stores?

Yes, I think if you can figure out what stores we're talking about there the 30 stores at Rochester.

Yes.

I think the Rochester stores certainly they have been performing quite well relative to what our expectations were on reimage. We certainly didn't expect to see double-digit growth rates out of our reimaged store we set out to do this initiative. But we were seeing more positive growth out of the stores up until the last quarter given the exposure that we've had to the weather in the north. But compared to other stores we're still pleased with what we're seeing from a customer service point of view and from a comp sales point of view relative to their peers facing similar I would say market backdrop from a weather point of view.

Could you give us I guess sort of the bit of spread between the southern store comp in the Northern store comp how big a delta was it?

I mean it was a couple of hundred basis points of performance.

And I guess for housekeeping could you give us the monthly?

Yes, so we were one second here Bret we were down 1.2 in October down 1.7 in November and up 0.4 in December.

And then one just this is sorry add the questions. On the supply chain side I mean just to throw the virus into it since that's popular these days you guys do a lot of direct sourcing the white box product out of China. Do you see any impact on supply chain from what's going on?

We haven't seen any to this point Bret. We're obviously working through contingency plans which we have had to develop actually related to the tariff issue. So we feel pretty confident that through the network of multiple supply points that we'll be able to overcome any particular issues coming from the virus.

I said no, [indiscernible] so I had to get my first virus question in there.

Yes I guess.

Our next question is coming from Rick Nelson of Stephens. Please go ahead.

To follow-up on the weather last year I think December, January you also pointed to mild winter weather. Do you think this year was incrementally worse than the prior year?

I think if you look at analyst reports that we've seen talking about I guess the impact that the mild winter has had on not only our category but I think other retail. I think the data would indicate that this has been more mild certainly versus last year. And I think we look at precipitation which is very important for us one must know with our tire business certainly it’s been a much more mild winter this year relative to last year.

Brett any update on your partnership with Amazon. What you're seeing there on the install side and how you think your tire prices compared to theirs and the tire category overall I'm curious about what’s happened with units in the period and market share?

Yes so let's start with units, where units were down to average selling price was up one for the quarter. How that compares we don't have a lot of syndicated data course we can look to and we depended upon that. We lean on I guess our channel checks and information from our tire manufacturers that have good visibility across multiple brands and feels like it is similar to other companies that have exposure to the North in particular Northeast to the degree that we do. We feel like we're probably in line with what we picked up through suppliers and others. As it relates to Amazon, I think we're still pleased with our relationship with them as well as other online tire retailers. We will eventually expand the relationship in FY 2021 to include all stores. We talked about last quarter our priority has been what I mentioned on today's call completing the tire category management pricing tool as well as the labor scheduling tool that are just for our organization. I think higher priority at this stage and expanding, but we are committed to expanding that relationship going forward. Related to tire pricing as you know Rick I mean the tire category is very complicated yeah over 30,000 SKUs that you need to manage effectively across multiple markets. And one of the reasons why we've invested in the tire category management tool is to do a couple of things. One is give us much better visibility into demand dynamics define by elasticity down to a SKU level. And by having that visibility it's going to create a much more granular approach that we're going to use for pricing. It allows us to price at the SKU level in our industry with the intent being strike that right balance between driving the right price to drive unit volume while preserving and expanding our tire margins through right mix at right price. I'm encouraged we're in pilot form of that now. We will be operational by Q1 of next year fully operational. The rollout of that is pretty small in scale we control our pricing centrally. So a small team of people will be trained up on using that system. But between now and Q1 we’ll be testing in parallel to make certain we're confident with the results that we're seeing from the system.

[Operator Instructions] Our next question is coming from Stephanie Benjamin of SunTrust Robinson Humphrey. Please go ahead.

I wanted to go back I know in the prior quarters when you start rolling out some of the store freshes you called out a hit or headwind to comp during that quarter really just from distraction would make sense as you're in there kind of reworking and revamping the stores. I believe you said it was about a 70 basis point hit last quarter. Could you quantify that this quarter or is there a way for you to kind of break that out or just weather overshadowed that?

Yes I think we said last quarter Stephanie that we - and we walked everyone kind of through the seven step process and talked about how we were retooling it to take a lot of that work or almost all that work off of the store teams. So we were able to effectively do that in Q3. We didn't expect that we were going to have to talk about a headwind and we really don't have to in terms - from disruption related to the store reimage. I think the California stores on the West Coast maybe saw a little bit more in disruption just because we did put a little bit more on them based on their - lack of proximity to our core resources that are doing the reimage. But for the 74 comp stores those were largely I would say undisrupted.

And then just as a follow-up when we look at the tire category in general what are you seeing from this over an inflationary environment. I know it was inflationary earlier this year kind of reviewing how you saw during the quarter and your expectations going forward as well?

Yes Stephanie when you look at, if you go back to Q2 one of the things we commented on was just we saw some inflationary pricing on. I would say the top end of the product category with more premium brands. And the first part of the second quarter we didn't see a lot of movement on the low end brands if you see the opening price point brands. We saw that change exiting Q2 and into Q3. And I think as you saw and we've made these comments in our prepared remarks. We certainly feel better about pricing moving up across all price points. Relative to that point in Q3, I think our expectation for Q4 is pretty stable environment around pricing. We don't expect meaningful or material changes in the next quarter. I think we're very focused now on now optimizing our internal pricing relative to the market leveraging the category management pricing so we talked about.

And then just lastly from me kind of more high level as we think through the strategy to expand your tire services that some of those, the mix changes that your service stores. Does that just by nature put you a little bit more successful to changes in weather on an annual basis to your point you said on this call that it is the tire category that were if it's a more mild weather where you don't really see the volume during that period? So does this mean that in these conversations going forward weather it could have a larger impact or similar to what we saw this year than maybe in prior years? So maybe your thoughts on that this high level would be great? Thanks so much.

I think strategically I would start with this they are - strategy and always we like the business model at our stores that has a very focused menu that's focused on tires and full service. I think you're not going to see us migrate to a tire only category as a broad sweeping strategy for all the reasons you just mentioned. We like diversification in the services. We like being very relevant on frequently purchased items like scheduled maintenance for cars and certainly breaks and other undercar services. I think as we increase our total business certainly we're going to pick up a little more exposure to tires as we convert more stores in the north I think do that. However, I think our broader company strategy is to diversify our store footprint more into the South and out West and certainly in those regions of the country you don't see I think the level of volatility that comes with the tire business like you would find in the Northeast and Midwestern markets.

Our next question is coming from Scott Stember of C.L. King. Please go ahead.

Following up on that last question about your high level about weather and I know the goal here was with all this heavy lifting that you're doing right now and all these new processes get to the point where I guess we're not talking about weather having worked. Weather does not really derail the quarter from a comp perspective? Could you talk about I mean just broadly speaking about how long do you think that will take for us to get to that point where weather could be a headwind but it's not going to be a determinant whether you're positive or negative from a comp standpoint?

Yes, I think given our exposure to the Northeast as long as our store concentration is heavy in the Midwest and Northeast inherent in that as we pick up exposure I think to weather. Obviously we don't like to talk about it Scott as you said. Our strategy is to diversify the footprint keeps continuing to grow down South and that's reflected by our acquisitions. We continue to build out Florida and have expanded now into Louisiana and Tennessee and certainly out West that reflects our desire to create more or less volatility in our business due to the store footprint. Now in our core store markets we don't accept internally the volatility in our business. And we're investing in technology as we talked about to help us better execute in stores through better trained people, executing better on the phones with our phone upgrade that we're currently doing. All of the initiatives under Monro forward are designed to drive performance in our stores regardless of weather, but I think will help neutralize some of the impact that we see from the volatility that comes with snow and colder temperatures.

And just a last question, I know that there were certain things like tire just - that we'll see an immediate impact from weather but more on the side of mechanical parts. Typically you could see an impact from warmer weather or colder weather a few quarters down the road. Is there a chance that we could see an extended negative impact on the mechanical part side in the next couple of quarters, and that's all I have? Thanks.

Yes thanks Scott. I think as we commented in the quarter our brakes were down 3% in the quarter. Certainly we're up against strong comp from last year, but also I would say we do sell a fair share of brake services through tires. If you take the consumers tires off their vehicle gives you the chance to inspect their wheels, their brakes and we do see some nice demand for conversion from tires into brakes as a result of that. As it relates to the downstream effect, I think certainly more harsh winters we tend to see to - gear up things on the vehicles. However, I will say one benefit of having a more mild winter is usually that leads to spring coming sooner. That opens up a window I think for an extended spring selling season. So look we're we feel like we're well positioned I think coming out of the winter given our strength and how we performed historically in the service categories and given the emphasis that we placed on good better best packages in store. I think we feel confident that we'll be well positioned going into the spring selling season.

At this time I would like to turn the floor back over to management for closing comments.

Thank you for joining us today and for your continued interest and support of Monro. We believe we are well positioned to execute our strategy and drive long-term value for our shareholders. We look forward to updating you on our progress next quarter. Have a great day.

Ladies and gentlemen thank you for your participation. This concludes today's event. You may disconnect your lines at this time and have a wonderful day.