Good morning, ladies and gentlemen, and welcome to Monro Incorporated's Earnings Conference Call for the Fourth Quarter and Full-Year Fiscal 2023. 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, this conference call is being recorded, and may not be reproduced in whole, or in part without permission from the company. I would now like to introduce Felix Veksler, Senior Director of Investor Relations at Monro. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we will be referencing a presentation that is available on the Investors section of our Web site at corporate.monro.com/investors. If I could draw your attention to the Safe Harbor statement on slide two, I'd like to remind participants that our presentation includes some forward-looking statements about Monro's future performance. Actual results may differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Monro's filings with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law. Additionally, on today's call, management's statements include a discussion of certain non-GAAP financial measures, which are intended to supplement, and not be substitutes for comparable GAAP measures. Reconciliations of such supplemental information to the comparable GAAP measures will be included as part of today's presentation and in our earnings release. With that, I'd like to turn the call over to Monro's President and Chief Executive Officer, Michael Broderick.

Thank you, Felix, and good morning, everyone. As we turn the page on fiscal 2023, I want to start off by thanking all of our teammates and customers for their contributions to the growth and prosperity of our company, and to our shareholders for their continued support. This was a foundational year of investment that sets the stage for a brighter future in fiscal 2024 and beyond. Before we get into the specific details, I like to acknowledge that our profitability in the fourth quarter fell short of our expectations. While disappointing, we are confident that this lower profitability was isolated to the quarter and does not represent the level of profitability that our strategy and initiatives are designed to achieve over the longer-term. We took decisive actions to improve our margins as the fourth quarter progressed, and profitability improvements from our actions have continued into the first quarter of fiscal 2024. I'll spend the first part of our call this morning with a brief reminder about our strategy, which serves as an important context, both to where we have been and where we are going as a company in the year ahead. After that, I'll provide an overview of the continued progress we've made, as evidenced by our sales results in the fourth quarter. I'll also discuss the factors that impacted our margins and profitability in the fourth quarter, and the actions we've taken to improve our margins and profitability, both as the quarter progressed, and into the first quarter of fiscal 2024. Lastly, I'll conclude with an update on the progress we've made to improve our corporate governance, which includes a planned recapitalization that will simplify our equity capital structure, as well as a plan to declassify our Board of Directors. Starting with our strategy, we operate in…

Thank you, Mike, and good morning, everyone. Turning to Slide 9, sales decreased 5.2% year-over-year to $310.8 million in the fourth quarter, which was due to the divestiture of our wholesale tire and distribution assets in the first quarter of fiscal 2023. Sales for these divested assets were approximately $30 million in the prior year fourth quarter. Comparable store sales increased 4.5%. And sales from new stores increased approximately $2 million. When adjusted for one fewer selling day in the current year quarter due to a shift in the timing of the Christmas holiday from the third quarter in fiscal 2022 to the fourth quarter in fiscal 2023, comparable store sales increased 5.6%. Gross margin increased 150 basis points from the prior year to 33.4%, primarily resulting from 210 basis points of benefit from the divestiture of our wholesale tire and distribution assets as well as material cost and distribution and occupancy cost that were lower as a percentage of sales. This was partially offset by 160 basis points increase in technician labor cost due to an incremental investment in technician headcount as well as wage inflation. Total operating expenses were $97.6 million or 31.4% of sales as compared to $93.2 million or 28.4% of sales in the prior year period. The increase as a percentage of sales was principally due to the divestiture of our wholesale tire and distribution assets, increased store management employee costs, and higher marketing spend to drive additional sales in what is typically our lowest sales volume quarter of the year. Operating income for the fourth quarter declined to $6.2 million or 2% of sales. This is compared to $11.5 million or 3.5% of sales in the prior year period. Net interest expense increased to $5.9 million as compared to $5.7 million in the same…

Thanks, Brian. We're optimistic about our outlook for fiscal 2024, and beyond. Although we still have important work to do, we remain well-positioned to execute our growth strategy and deliver long-term value creation for our shareholders. With that, I'll now turn it over to the operator for questions.

Thank you. [Operator Instructions] We have our first question coming from Bret Jordan from Jefferies Group. Bret, your line is now open.

Hey, good morning, guys.

Good morning, Bret.

Morning, Bret.

Could you talk about price versus traffic in the comp?

Yes, I'll address that. Comp was, you already know, about 5%. It was driven through flat customers, and the rest, obviously, was price.

Okay. And then could you talk about regional performance of the stores, West versus the Southeast and Northeast?

Across the board, it wasn't a lot of change. But if there's anything I would highlight it's the West was stronger and then the Northeast slowed down. And some other retailers talked about it, so I'll bring it up, there was some weather event, although we didn't focus on it, and everything's kind of normalized as we've gone into Q1.

Okay. And you talked about working capital, obviously being $95 million to the plus. What's left in the tank there as you've shifted from an internal distribution model to more outsourced supply, could you give us a ballpark for what we might expect to come?

Bret, we're not providing specificity around the future opportunity. There's work to do to take advantage of further opportunities we have to reduce working capital. But there is opportunity there. And we expect that, in fiscal '24, working capital reductions will play a large part of our continued strong operating cash flows.

Okay. And then the monthly, and I'll get out of the way, the monthly [indiscernible]?

Yes, sure. Yes, absolutely, January was around 8, February, 5, March around 1, and then we said we were up 2 quarter-to-date.

Thank you, Bret. We have our next coming from Brian Nagel from Oppenheimer. Brian, your line is now open.

Hey, guys, good morning.

Good morning, Brian.

Morning.

So, the first question, Mike, in your comments you talked about some of the corrective actions you took on the expense side. I was wondering if you could just elaborate a little further on that. And as we're thinking about this now against -- said you're improving sales, are there further actions you're going to need to take on the expense side, whether it be in the cost of sales or the SG&A or is this more or less a one-time adjustment, and you'll get the benefits going forward?

I like the work that the team put in place in Q4. Brian, let me just regroup. We were very clear, and I've been here for two years now, very clear on three big initiatives; sales, margin, and cash. Seems like the sales, now we have two quarters in a row, mid single digits, and that's always been the expectation. Cash, it speaks for itself. We had a record year in cash, and we're talking about actually having another strong year in '24. It's all about the margin. And I would say that I've been disappointed in the margin. I wasn't happy with January results. And I made adjustments, and the adjustments were using price. I'm very focused on having a balanced approach between service and tires as I see my customer account shifting and skewing to more opening price point, I made the adjustment. I would say that I'll continue making those adjustments; it's a very balanced approach. I do not want to be an only-tire provider. I believe Monro's greatest strength is that we are full-service provider. So, the pricing actions that we put in place are literally to continue the focus on a balanced approach to the business. Now, on the payroll front, great work on the teams. That's just good management, what I look at on a week-to-week basis, where we're really just managing payroll on an everyday basis, and addressing any unproductive labor, making sure people are taking their lunches, making sure they go home on time, really talking about having a balanced approach to an employee's life; I think it's just good retail. That will continue in Q1, and in '24, and beyond. I would say that we finally got traction on our expanses. I finally have traction on our margin. And I look forward to having a strong Q1. We talked about, for the first time in my two years, giving guidance. So, we're confident in our initiatives, and they will carry forward.

That's helpful. And then the second question I have just with respect to top line. So, the goal here has been mid single digits, you got that in the fiscal of Q4. And recognizing month-to-month in your company and your business can be very choppy, but right now you're not running [it] (ph). I would say you're doing it [chilled] (ph). How should we think about the current run rate here versus that goal of getting to mid single-digit-type comps?

I think some of the initiatives that we put in place were abrupt. And they were put in place for a reason. And I would say that we are still focusing on the process at Monro, really creating the Monro way, it's still our greatest opportunity, is that we are more relevant to our guests that are coming in, doing a better job in our stores. And we're still very much focused on mid-single digits. Now, on the tire category, we shifted. We absolutely took advantage of a customer. Our customers were skewing to value; we made price adjustments up and down in order to shift from OPP up through our product screen on the tire side. If we're more expensive than we were before, we might not have attracted the lowest-price consumer who is looking for the cheapest tire. So, that might have slowed down some of the categories. But I do want to recognize that we didn't do anything in our brakes. We had double-digit break comps in January, and that slowed down through the rest of the quarter. And that had nothing to do with pricing. That had nothing to do with our store execution. It had everything to do with probably a customer that was deferring, and they're still trying to figure out their own personal balance sheet. We're very focused on getting that service mix back and obviously having a healthy tire screen.

Thanks, guys. I appreciate it.

Thank you, Brian.

Thank you, Brian. We have our next question coming from Daniel Imbro from Stephens. Daniel, your line is now open.

Yes, thanks. Good morning. Thanks for taking our questions.

Good morning.

I wanted to follow up on that last question or that last answer, Mike. That last question around opening price tire points, you raised prices. I think in your prepared remarks you said, in the fourth quarter, you maintained tire share. I think if I look at the last couple quarters, you've been saying you're gaining share in tires. So, I guess it sounds like there was a shift there or a willingness to kind of pause the market share gains. I'm just curious how the competitive set has responded or are others raising price, are you the only one? And as we look forward, could that continue to limit share gains or how do you think about the competitive long-term impact of raising these prices with consumers facing this pressure?

So, Daniel, the way category management works, we are very focused on gaining market share. Now, we want to have the right mix of market share. So, I don't want to be the low-cost provider of tires in the marketplace, and I want to be really clear on that. I have a strong assortment of tier 3, tier 2, and tier 1 tires in my stores. So, when I started seeing our customers skewing into tier 4 opening price point, that wasn't healthy for Monro, that wasn't healthy for our customers, and we addressed it. Now, the way going back to market share, it goes back to the strategy. I want to have a long-term relationship with my customers. Part of that has to be a value proposition that we are very careful to make sure we maintain, and it's in check. At this point in time, when I'm looking at flat customer count, I'm not happy with it, but we've stopped the bleeding of customer count at Monro. And that's something that I'm very proud of. One of the tools that we're using is price, another one is assortment. But the biggest one we have is store execution, and that's what we're focused on. So, when I look at our market share I'm going to say we maintain market share. I'm okay losing market share on opening price-point tires as long as I have a healthy relationship in my tier 3, tier 2, and tier 1 tires at the same time. Oh, and by the way, I want a very strong relationship on my service categories with my customers.

Yes, I got it. That's helpful color on the strategy, thank you. Maybe following up, on the underperforming 300 store chain, I think you said comped up a 7 in the fourth quarter, correct me if that was wrong. I think that is the narrowest gap that we've seen to the overall chain comp, call it 300 basis points of outperformance. I think the first part of this year, that that group was comping double digits pretty comfortably. Are we just towards the tail end of the improvement here, or what drove that narrowing gap versus the chain, and what does it take for you to reaccelerate that growth at this underperforming store base. Thanks.

No, thank you. Daniel. Important question, we do recognize that it slowed down, 7% was the number. It is a multi-year opportunity. Just like it declined over years, it's a multi-year opportunity, and we're still very much focused on it. I would say at this point in time that our results are not linear, but I do expect us to continue to grow double-digit comps in these underperforming stores, and that's what the team is focused on delivering.

And so, in the first quarter, if we think about that 2% to 3% overall comp, is that assuming the core chain is going to be closer to flat and this underperforming chain reaccelerates the double-digits or how are you thinking about in this first quarter guidance, what the breakdown is in the comp mix?

Yes, obviously, without getting into much specifics, we expect that the underperforming stores will be leading that comp higher and the rest of the chain will be positive, but not as high as the underperforming stores. So, we expect there to be a gap between the two store sets.

Great, I appreciate all the color, and best of luck.

Thank you.

Thank you. With our next question comes from John Healy from Northcoast Research. John, your line is now open.

Thank you. We just love to hear a little bit more thoughts about the M&A pipeline and what might be presenting itself to you in the current environment. And as you think about M&A, and I think you guys were active on the buyback front this quarter a little bit with the stock kind of at the point of I think you guys bought stock back at 44 or so. What becomes the priority at these levels? Is it the buyback or is it the M&A footprint for this year, do you think?

Thanks, John. I'll take that. I think that Mike talks a lot about balanced approach, and I think that's how we view our capital allocation strategy as well where we have a lot of optionality, given our strong financial position, a lot of liquidity on our revolver, and we're generating a lot of cash flow, so we can address all of our capital allocation priorities. And that's obviously our dividend, which we announced today. It continues to be share repurchase opportunistic there as well as opportunistic on M&A. So, for us, we are doing all the work that we would traditionally do around M&A opportunities and looking to grow our store footprint. We obviously have a lot of energy focused on our internal store operations at the same time. And that's where we talk a lot about our business on the call today, but we feel good that we can continue to deliver shareholder cash back to our shareholders while executing that. And I think our 0.6 times EBITDA leverage ratio really supports those comments.

Okay, fair enough. And just one housekeeping question for me. I think this year you guys are calling out a 53-week year versus a 52. Can you just remind us how that 53 week in Q4 typically impacts the P&L from a margin standpoint? And with that, is that extra week included in the mid-single-digit comp sales growth. So, just curious if that reflects a point or two from that calendar item?

Yes, the outlook that we had for FY'24 mid-single-digit as well as our color around gross margins and profitability is reflective of that extra week in March, the sales increase in March, it does have fewer fixed costs that tag along with it in that extra week, but does have some fixed costs. So, we'll get some leverage in that last week, as you would expect. We're not quantifying that specifically, but it is reflected in our outlook.

I appreciate it. Thank you.

Thank you.

Thank you, John. We have no more further questions on the line. I will now pass back to Mike for closing remarks.

Thank you for joining us today. This continues to be an exciting time to be part of Monro. We have a strong foundation to build upon to create long-term value for all our stakeholders. I look forward to keeping you updated on our progress. Have a great day.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.