Good morning, ladies and gentlemen, and welcome to Monro Incorporated Earnings Conference Call for the Second Quarter of Fiscal 2024. At this time, all participants are in a listen-only mode. [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'd 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 website 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. I'd like to spend the first part of our call this morning walking through our second quarter performance, which reflected top line results that were challenged. This was due to consumers deferring tire purchases as persistent inflationary pressures impacted purchases of higher ticket items across the retail spectrum. This was clearly evidenced by an industry-wide slowdown entire unit sales in the regions of the country where a vast majority of our store footprint is concentrated. We mitigated this slowdown with actions to reduce non-productive labor costs, including overtime hours in our stores. Despite a tough macroeconomic environment, the resiliency of our business model allowed us to expand gross margin and maintain our year-over-year profitability even on a lower tire sales volume. I'll also discuss our plans to deliver improved earnings this fiscal year despite some of the consumer related headwinds that we and others in our industry are experiencing. Before I get into the specifics, I'd be remiss if I didn't take a moment to recognize and thank all of our teammates for their continued dedication to Monro, serving the needs of our customers as well as their positive contributions to the communities where we operate. Now turning to our second quarter results. Our second quarter comparable store sales declined approximately 2%. Comp store sales were down approximately 1% in our 300 small or underperforming stores, and down approximately 2% in our remaining store locations. As I stated earlier, our sales results in the quarter were challenged by consumer deferrals of tire purchases as evidenced by industry-wide slowdown entire unit sales in the regions of the country where a vast majority of our store footprint is concentrated. This led to pressured store traffic, which was not supportive to sales of our higher margin…

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] And our first question today is from the line of David Lantz of Wells Fargo. David, your line is now open. Please proceed.

Hey, good morning guys, and thanks for taking my questions. So you're guiding the comparable sales growth in fiscal 2024 and in the context of October comps being down 5%, curious if you can talk about your expectations for the balance of the year, and if any of that improvement assumes an overall improvement in the macro. Brian D’Ambrosia: Thanks for the question, David. This is Brian. If you look at our back half, I just want to remind everyone we've got an extra week in our fourth quarter, that for -- that extra week is about 2% on the annual comp. So that is factored into that commentary around comparable store sales growth for the year. But we do expect, and it factored into that comp store sales growth is improvement off of the down five trend we talked about in October. And I think that's driven by what we hope to be better consumer dynamics in our tier one through three tires, which we are expecting that weather and that supports a tire selling season in the back half will help to drive that inflection.

Got it. That's helpful. And then just a longer term question. On getting back to the low double-digit EBIT margins, can you provide a glide path on what sort of improvement could be driven by gross margins and what else could come from SG&A?

I'll start with the margin, David. I would say that we -- even in this quarter, considering our down sales, we were able to show margin improve. We do feel like that will continue to improve through assortment decisions and the right tire and service mix in our business. We feel like we've done a lot over the last 12 to 15 months to get ourselves in a position where we can clearly see what margin and going back to margin of pre-COVID levels and the fact that we have payroll very much in under control. The team has done a nice job responding to the environment, whether it's up or down, and mitigating some of the wage investments that we've had to put in place over the last two to three years. Brian D’Ambrosia: And just to add to that, David, if you think about margin at 35.7 for our second quarter that was driven year-over-year by 120 basis points of improvement in material costs as a percent of sales, and then offset by about 90 basis points of a combination of our D&O and labor, and largely call that 90 basis points deleverage on the lower sales. So if you -- if our planning assumptions around the top line to flat come true, then you look at that labor, and D&O deleverage is kind of dissipating. You put 90 basis points on top of the 35.7 and you start to get into the some meaningful gross margin improvement on the path to double-digit operating margins. But G&A has been a focus, and if you look at our G&A in the quarter, it was flat year-over-year from a dollar standpoint. It delevered a little bit because of the lower sales, but our focus is to continue to drive flat G&A year-over-year in order to try to gain as much flow through on the sales we're delivering. That's obviously our goal. And so far we've been able to offset a lot of the year-over-year inflation with efficiency gains in G&A.

Got it. That's super helpful. Thank you.

Thank you, David.

Our next question today is from the line of Bret Jordan of Jefferies. Bret, your line is now open. Please proceed.

Hey, good morning guys.

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

Could you give us a little detail on car count, I guess ticket versus traffic in the comp and then I guess Brian, the usual, the monthly comp breakout? Brian D’Ambrosia: I'll start with the traffic. Traffic was down mid single digits, and the ticket was up low single digits, but I would say that for a minus two, but a lot of what we looked at was going back to the tire story. So just to be clear on the OPP, this was a tire quarter for sure. We were just down -- we mixed up, which we like mixing up to tier one through three. That's drives profit. And I would say that -- because the tire count was down, we actually lost some of the attachment too. So we do look forward to the consumer coming back in the quarter. Generally, we're waiting on a weather event right now in the month of November to drive the customer coming back, and then we'll appropriately drive the improved transactions as well as the attachment that goes along with it.

Okay. Brian D’Ambrosia: And then regarding the cadence in the quarter, July was up 0.5, August was down 2.5, September down five. And those trends all really, like Mike said, driven by tire unit declines as the quarter went on and also consistent with the industry data that we mentioned in the prepared remarks that we were comparing ourselves against.

Was there much regional dispersion? I guess you guys kind of called out that your primary markets saw a lot of pressure from the consumer. Was the West better?

The West was better, but I would say it's marginally better. But to our prepared remarks, a lot of the pressure was definitely on the East Coast.

Okay. And then one final question. I guess, the working capital benefit, when you think about how you're running with sort of an inventory lighter model, what's -- what do you think is left? Like what's if -- as we look at the balance sheet today and the model, like what more could we extract from the inventory on cash? Brian D’Ambrosia: Great question. I think if you look at Q1 to Q2, you definitely heard the metrics start to flatten out a little bit. We're still at about 72 days of cash conversion cycle reduction still around 190, 195 of that inventory to AP ratio or AP to inventory ratio. So I think you're -- it's definitely showing that we're in some of the later innings, but there's still more benefit to come as we get new vendors signed up for extended terms and also continue to drive volume through our existing vendors on the programs. But I think the slowdown in some of the growth in the year-over-year metrics is indicative of kind of later innings.

Okay. Great. Thank you.

Thank you.

Our next question today is from the line of Brian Nagel of Oppenheimer. Brian, your line is now open. Please go ahead.

Hey, this is William Dossett on for Brian. Thanks for taking my question.

Good morning, William.

So -- thank you. So the first question is just about the consumer. What can you do internally to drive comps and gain increased traction if the consumer remains pressured? And with respect to the industry, what pressures need to ease for us to see an improvement in the current trade-down trends and deferral trends that you're seeing here?

Yeah. So William, this is Mike. I'll take it. Regarding your first question, we talked about this in Q4 also the fact that we decided not to literally shift our mix to OPP, there was a lot of reasons for it. First of all, it wasn't profitable. We were making little money and we were spending quality wages on really expert technicians to be able to install cheap tires. That's not our business. And by the way, we actually saw customers who were buying those tires did not want to attach even though their cars required it. And that specifically hurt us on the brake category and some of the other service categories that we like and we actually -- that's our business model. That's number one. Number two. So what we did is we put price in and we reassorted our stores. We actually saw the fact that our assortment, it drives a profitable consumer that drives profit for our organization. We're able to manage our margins appropriately, and we're able to mitigate whatever expenses that we have just through oversight on overtime and some of the wage investments that we've put in place. So now what we're coming through is Q3 of last year, we have a lot of this in the marketplace. Q4, we really made the change where we were starting to get a balance mix. When I say balance mix, basically we wanted to have healthy growth in tier one through three, and the appropriate offering for tier four. At this point in time, when we're looking at the consumer -- to answer your second question, it's all about now a weather event to really drive a customer that's coming in. We do not see that customer. Literally, they're deferring, there's a high ticket, they're deferring. We see a weather event really changing the consumer. And when they come into our stores, we really look at this winter selling season as it's going to be very short. When it comes, it's going to come strong and we're well-positioned for it. Really coming into Q3 as well as in Q4, we actually see a lot of what we put in place in Q3 mitigating in Q4, where we can see now back to normal comps.

Okay. Yeah. That's very helpful. Thank you. And to follow up on that and to ask about the guidance for the full year, can you remind us what the compares are with the weather? And what gives you confidence that the weather can drive improved comps via just historical knowledge of the business? And also just with the full year comp, can you talk about the breakdown or your expectations between ticket and traffic?

I'll start with the ticket and traffic. We generally focus on a balanced approach to it. So we do expect to have -- I mean, coming out of October, if we have a weather event, we have a heavy customer count growth. And then also the -- it shifts to tires, which is a large ticket item. And then we have to just manage the expenses. When I look at the comp for the rest of the year, I'm seeing that we're going to go through a tough November/December. We're going to -- if we have a winter event, we'll be able to mitigate our comp story. But Q4, which is -- Q4, it seems like we have -- we started this initiative in Q4, and the comps do get softer in Q4. And of course, we have a 53rd week that's also included in that.

Okay. Thank you very much.

Thank you, William.

[Operator Instructions] And our next question today is from the line of Daniel Imbro of Stephens. Daniel, your line is now open.

Hey, good morning guys. Thanks for having our questions. I guess, I want to start again, Mike, maybe on the 300 small or underperforming stores. Obviously, they're seeing the same maybe deferrals and struggles as the rest of the industry, but I'm curious, just operationally, when you look across them, we've been improving those for about a year. They've generally done better than the stores. Like what's left to do from a self-help standpoint in those smaller stores? Can they grow without an industry turnaround, or from here are they kind of dependent on a similar macro improvement at those 300 underperforming stores?

Daniel, when I look at the overall store performance, I focus on those underperforming stores as a double-digit growth opportunity for us. There's a lot of variability in that performance. I actually see a large subset of those stores that are performing extremely well. That gives me a lot of confidence that we're on the right path. It's a people story, it's a retail execution story. I would say this is always going to be something that we're going to focus on from the day I started with the organization. We always identified underperforming stores, poor performing stores. It's just part of retail. These stores are located in good areas. It's all about people. It's all about process. It's all about execution. And that's why it's always going to be part of our storyline of -- the reason why I feel confident that we can grow this company.

Okay. That's helpful. And then maybe moving over on the market share side, I think your commentary said you retained share in the higher margin, higher tiers, but obviously I didn't hear a commentary in the lower end tiers. So is it just that we're seeing some competitors be price irrational out there on that opening price point, so you just don't maybe want to retain share there? And then based on history, just if you could share some context during periods of past macro pressure. I would guess opening price point, maybe gains a larger percentage of industry sales. Is that true? So maybe where you guys are losing share, is that going to maybe become a bigger part of the industry for the next few quarters if the macro keeps getting tougher?

We don't see -- we saw -- first of all, just to go back to market share, we definitely decided not to over assort our stores with OPP tires. So it wasn't just about pricing, it was about assortment too. And there's a lot of reasons for it. We proved that out in Q4 that when selling we -- in Q3 when we -- of last year when we sold a lot of OPP tires, we didn't make a lot of money on it. When I look at market trends, I do believe that tier one through three have a position in the customer's from a customer lens. They absolutely have demand. We did not expect to have a soft tier one through three when we looked at this -- in our -- really our forecasting and our performance modeling, we do expect that business to come back and when that comes back, we're well-positioned for it. We have an OPP offering that tier four, we have it in our stores. It's priced right. It's just a question of we're not going to lean into it because when we lean into it, we saw that we don't make money. We saw customers trading down from 1, 2, 3 unnecessarily into tier four and we wanted to stop that because it wasn't good for the consumer.

That’s helpful color. And then last one, maybe Brian, just to follow up on Bret's question. Cash conversion has stabilized, cash flow maybe improves when sales do, but can you talk about how you're just thinking about uses of cash? Another quarter, I don't think you guys were active on the buyback, just where does that fit into your capital priorities? And maybe what are you guys looking forward to get more active on that use of cash? Thanks. Brian D’Ambrosia: No, thanks Daniel. We look at it as a balanced approach. Like, we are looking to continue to reduce our invested capital. And we talked about that being $70 million so far through the first six months approximately. And it's been more debt led right now. But if you look at the balance since we announced the buyback, it's been pretty much 50-50 in terms of debt reduction and share repurchase for the amount of total capital that -- invested capital that we've retired. So I would think that going forward over a period of time that's going to continue to be balanced, particularly as we start to get lower in the debt balance and the opportunity kind of diminishes to continue to paydown debt and reduce interest expense. There's going to be more opportunity to fulfill the require -- the remaining authorization that we have a $53 million on our $150 million authorization. So it's going to be balanced and we look to continue to generate that excess cash flow in order to continue to return that invested capital.

All right. Thanks so much and best of luck going forward. Brian D’Ambrosia: Thank you.

Thank you.

Our next question today is from the line of John Healy of Northcoast Research. John, your line is now open. Please go ahead.

Thanks guys for taking my question. Just wanted to ask a little bit about the comments on -- hey, good morning. I just wanted to ask a little bit about the comments on reducing less productive labor. It sounds like a tricky thing to do, whether it's the location or maybe the tenure or the talent, and especially with the shortages of mechanics out there. So we'd just love to get your big picture thoughts on how you're evaluating that and what you're doing there, and are we interpreting it the right way thinking that the labor is at the store level?

Yeah. No, you're interpreting it the right way. We're very focused on the store level payroll. We've spent over the last two and a half plus years staffing up our stores, so we can get ready for the -- what we believe is the tailwinds of the industry. We're very focused on training our technicians, very focused on making sure we retain them and we keep them qualified to do the work that comes through our shops. What I focused a lot of my -- and the team's focused on is really mitigating wage and the wage expansion and why we're so focused on talking about overtime every quarter because that's the number one way that we're controlling payroll, unproductive payroll, making sure the stores are staffed and mitigating the wages through overtime. We definitely are focused on making sure our stores continue to be staffed with quality technicians. That's not going to change -- when I talk about unproductive payroll, it's mostly about overtime.

Got it. That makes perfect sense. And then just kind of industry type question. One of the things that surprised me recently was some of the Michelin commentary that US replacement shipments into the US were up like low double-digits in September. Just kind of your reaction to that, is that a sign that the industry is restocking or maybe a sign that you're starting to get some relief on pricing. So maybe folks are taken in product or you just thought it was odd number. Just kind of curious kind of your thoughts on that.

Yeah. I don't have really anything that I have to support a comment about it. So I just look at making sure our vendors are shipping to us when we require it. We have an excellent relationship with ATD, so we have a lot of our inventory is just in time and we have a very supportive vendor community. When we're down one through six -- down 6% in tier one through three, that affects obviously our large manufacturers and they're investing in us to drive traffic. So the good news is we have great relationships with our vendor partners. We'll continue relying on that vendor partnership relationship, and we do expect the customer to come back and they'll be beneficiaries of it just like us.

Great. Thanks guys.

Thank you. Brian D’Ambrosia: Thanks.

Now we have no further questions in the queue today. So I'd like to hand back to Monro CEO, Michael Broderick, for any closing remarks. End of Q&A:

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.

This concludes today's call. Thank you all for joining. You may now disconnect your lines.