Good morning. Thank you all for joining us. My name is Brian Nagel. I'm a senior equity research analyst here at Oppenheimer, covering consumer growth and e-commerce. This is our 25th annual Oppenheimer Consumer Growth and E-commerce Conference. We very much appreciate all of you attending. I'm pleased to have with us our next presenting company, Monro, and two of the company's senior executives, CFO Brian D'Ambrosia and investor relations, Felix Veksler. Gentlemen, thank you for joining us.
Thanks for having us, Brian.
We're going to structure this as an informal fireside chat with me asking questions and the Monro team answering those questions. To the extent there are questions from the audience, just send them through the chat, and I'll be happy to work them into our conversation. With that, Brian, I was hoping maybe we could just start. Not that long ago, Monro reported quarterly results. The stock had a nice pop on those results. Maybe we can just start kind of with a quick recap, if you will, of that quarterly announcement. What'd you view as some of the highlights there?
Absolutely. In the quarter, we delivered positive comp store sales growth of 2.8%, adjusted for days. Our prior year was a 53-week year. Adjusted for that, we delivered a 2.8% increase in comps. We also saw sequential improvement in comps as the quarter progressed. Comps in our tire category, in our high-margin service categories, both on a sales and unit basis, improved. Importantly, we saw a year-over-year increase in traffic in March, which was the start of a trend that continued into April and May. Our overall gross margin and profitability was pressured in the quarter. We saw 250 basis points of deleverage on our gross margin line. That was exacerbated by some impact of extreme weather in the first half of the quarter. That resulted in some store closures and some lower store traffic in January.
Profitability in the second half of the quarter was better. Overall, that sales momentum has continued on into April and May through the first eight weeks of our fiscal Q1, with basically mid-single-digit comp store sales growth in April and May. That is continuing to be supported, like I said, by better traffic trends. We are glad to see that we are bending the traffic curve in the recent months. That is really the highlights from the quarter in terms of results. We did also announce some initiatives that I am sure we will get into related to what we are looking to work on for the balance of FY 2026.
That's very helpful. Let's just maybe a little more on the quarterly results before we dive into the other issues. I mean, look, for me, the key positive here is that you're seeing stronger sales growth. You talked about that a moment ago. How should we think about that? Is that a reflection of the initiatives that have been happening in Monro? Is it a better sector backdrop? Is there a weather component?
Yeah, I think that it's a continuation of the improvement that we've seen all the way back to our Q1. We've seen sequential improvement in comps from our low point in Q1 all the way through the positive 3%, roughly 2.8%, that we delivered in Q4, and that continuing on in April and May. I think it's a continuation of that comp trend, which really has been supported by an improvement in tire units. We've seen a recovery in our tire units to now year-over-year unit growth. We made the comment that we grew units in Q4, and that was led by a 10 %+ growth in tire units in March. That trend is supportive.
It is that unit growth is putting some of the pressure on our gross margin because we are fairly promotional versus what we were a year ago to continue to attract value-oriented consumers into our stores and to also maintain the appropriate mix of tires without having them trade fully down to our tier four offering, which is an even lower margin offering for us. That has been supportive. At the same time, during FY 2025, we implemented our ConfiDrive digital courtesy inspection. The benefit of that is that when we laid it out, was that ultimately we are going to be able to convert more of our existing traffic into other services and better build our service tickets off of our existing car count.
I think as we have seen that play out as well with the inflection in our service categories back in Q3, we talked about the momentum that we were gaining in our service categories. That growth continued in Q4 with all except for alignment service categories up in the quarter, and that continuing in April and May. I think the recovery in tire units with the conversion into service categories from ConfiDrive has really been the difference over the last couple of quarters, and in particular, the four-month positive comp period that we started in February that we talked about on the call.
That's very helpful. I do want to take us one step back. It's been a rather significant leadership change at Monro just recently announced. Maybe you can discuss that, kind of the nature of the change, the new management team, and so to say the mandates that this new team is under.
Yeah, absolutely. Peter Fitzsimmons assumed this role of CEO basically the first day of our fiscal FY 2026. Peter's primary objective is to work with the company's management team and the board and develop and execute a performance improvement plan. That will enhance our operations, drive operating income, and ultimately total shareholder returns. Peter spent the first 8+ weeks of his tenure with us here in Rochester with senior leadership anytime that he has not already been out in the field. He's been fully immersed in our business. Like I said, spent a lot of time with leadership and our teammates in the field. He has visited a lot of our stores, but also a lot of our competitor stores to really understand what opportunities we have.
First and foremost, the time he has spent already has confirmed his positive view that he had about Monro coming in. Basically, it's reaffirmed his belief in the durability of our business through business cycles, that we're well positioned as a leader in a very fragmented industry, and that we have scale that gives us competitive advantages over smaller players. That scale allows us to make the critical investments in our business, our people, our technology, like I just mentioned with ConfiDrive, to deliver that guest experience that we want to across our thousand stores. On top of that, from a financial standpoint, our business is a consistent cash generator, admirable liquidity, solid balance sheet, low bank leverage. A lot of positives for us to build on.
In terms of building on those positives, on our earnings call, Peter laid out his initial assessment of the business and highlighted four key areas of focus that he identified as opportunities to deliver that improved operational profitability and operating income that will ultimately lead to improved shareholder returns. Those four areas included the closure of unprofitable locations, improving our customer experience and selling effectiveness, driving profitable customer acquisition and activation, basically marketing, and then increasing the merchandising productivity, which includes our tariff response. Those four areas are the work streams that we have activated against and believe will deliver value for Monro in FY 2026 and beyond.
Yeah, so maybe those are a little less familiar with Monro. I do want to highlight, Peter comes, and I'm going to say this may be a little funny, but you can clarify it. Peter comes to Monro as a part of a consultancy, correct?
Yeah, so we have a direct engagement with AlixPartners, and through which Peter is our CEO, through that engagement. Make no mistake, Peter is our CEO, fully immersed in the business, spends his 60-80 hours a week in Rochester or in our stores or working on Monro from any other place in our field organization. He is very committed to delivering on the performance improvement plan that we laid out.
Now, you mentioned, I think briefly, but I want to focus a little more. You announced the closure of, I think it was 145 underperforming stores. Maybe we could just discuss that. How should we think about those stores? Going forward, do you and your team continue to sort of, say, review the portfolio of stores for potential other closures?
Yeah, it's a great question. It's our most immediate of the four in terms of the activities that are all underway. We conducted a store portfolio review, looked at all of our underperforming stores and then some, and identified out of those underperforming stores, 145 to prioritize for closure. The review included the evaluation, obviously, of the store's performance, but also market data like market segmentation, demographic data, density within the market, both us and our competitors, and all that data specific to each location. With also a focus of how the stores are situated within our network. I would say first and foremost, we did not exit any geographies, any markets. This was not a targeted geographic decision. These stores are located throughout our footprint.
We have set in motion a process to close these locations by the end of our current fiscal quarter ended June 2026. It will have a limited impact on sales. We said that the stores have about 5% of our total sales. That is about $45 million of reduction for FY 2026, which is a partial year, taking into account that we have operated these stores for a couple of months in our Q1. The impact on profitability will be more meaningful than the sales reduction. In Q1 of FY 2026, we are going to incur some closure costs. In our most recent filings, we disclosed about $10-$15 million of expected closure costs in our Q1. Obviously, as a retailer, we will continue to evaluate all of our stores every year like we have been.
We do not anticipate any significant chunks of store closures for the remainder of this year. All the assumptions that we made as we laid out the performance improvement plan as well as the evaluation of the stores will continue to be revisited to make sure there are not any other groups of stores that are not making the, are not able to achieve the profitability levels that we expect they will be able to make with the other parts of the improvement plan. That is one of the reasons that we want to get the closure done quickly here, because we have a lot of value we think we can deliver through those other initiatives. We want to move quickly on from closing stores to improving the operations of our remaining stores.
Got it. Again, I've followed Monro for a while now. Again, we have this repositioned effort taking hold now. I guess the question I want to ask though is from a longer-term growth, so maybe the other side of the question I just asked with store closures, but Monro has historically grown primarily through acquisition. Where's the company right now on the acquisition or M&A front?
Yeah, so we've been on pause for the last, I would say, couple of years. The reason is we've been focused on delivering some of the improvement that we expect to be able to deliver through these initiatives and capitalizing on our most recent performance in our Q3, Q4, and into Q1 of FY 2026. We've been internally focused. At the same time, we really haven't missed out on anything that we wanted to do. We still evaluate deals that are done in the marketplace. Our focus has been on improving our own operations and really building the consistent and solid platform for us to launch Monro's next round of unit and store location growth.
That's one of the reasons why our capital allocation priorities are to continue to use our excess cash flow that isn't allocated to CapEx or to our dividend or to our finance lease payments to use that to continue to maintain a really low leverage profile on the revolver. Because ultimately, I'm not going to give a specific timeline. I wouldn't expect too much in 2026. Ultimately, we do believe that one of our key growth drivers will be continuing to grow the business against that solid platform that we're putting in place and leveraging all of the processes and improvements that we expect to deliver against a larger store count. That will ultimately lead to meaningful value for our shareholders.
At what point, in case of, at what point do you think you would start to grow again? Is there a timetable for that?
Yeah, I mean, there's no timetable. I would say we've got a lot to do in FY 2026 that ends in March of 2026. I think we laid out on the last earnings call where our focus is going to be against the four initiatives. I think that the delivery of those initiatives and progress against those initiatives will put us on the path for that future unit growth.
Discuss a bit just the competitive landscape. Monro is really one of the biggest players in the space, but the space is quite fragmented. How should we think about competition in this space? Are there areas where Monro has significant advantages? Are there areas where Monro has to sort of say catch up with other competitors?
Yeah, I think it's a very fragmented industry. Ultimately, the consumer really cares about their local experience, right? They are not as interested in the fact that you've got a thousand stores across all these locations as how does my local Monro deliver the experience to me? Do I trust them? Do they do it right the first time? Are their prices competitive? Ultimately, as we assess the value that we deliver to our consumers, it's through the lens of the local experience. We can bring a lot of things as a national chain with scale and a lot of resources to improve that experience, like our digital courtesy inspection. We can also deliver very compelling value for our consumers because of our scale and buying power. We're doing that through our promotional offerings. That's helping to support our tire traffic.
We continue to invest in our technicians and our labor. That is so that we can deliver a good experience where we're doing our work right the first time and our technicians can deliver on that promise. We feel very well positioned to deliver on all the areas that we think matter to the consumer. We think that our initiatives that we laid out relative to marketing and store experience merchandising are aligned with what the consumer wants from that local shop. We are competing against national chains and those one and two store operators that have a local presence in any given market. Because of that, we need to make sure we leverage our strengths in order to outperform those competitors for the local consumer.
You've talked about this a bit, but I want to maybe focus a little more on just that in-store customer offering. I mean, some of the, and that's been a big focus for Monro for a while now to continue to improve and tweak that, tweak and improve that. Maybe we can talk about some of the bigger initiatives there, some of the success so far in that consumer offering.
Yeah, absolutely. I mean, it's been a journey for us as we've acquired tire chains over the years. We've used that to put tires into our service locations. Our offering has continued to evolve as we've broadened out our tire assortment across all of our locations, regardless of their service orientation or tire orientation. Now this initiative is really focused on making sure that our breadth of offering isn't overly complicated and that we can simplify it both for our in-store teammates and for the guests. At each tier of tire, we really have a focused assortment that we stock, present, and promote for our teammates and our guests to have a really good, simple conversation in store about what their options are and what the best fit for their vehicle will be. That being said, this is about what our core assortment is.
It's not about what we have availability to obtain. We will always be able to get any tire that the guest wants or needs or potentially that the teammate may recommend in a certain situation outside of our normal assortment. We will be able to do that through our distribution relationships that allow us to get same-day delivery of tires to all of our locations. We're going to narrow the breadth of our core tire assortment. We think that'll create a much more efficient process in store and ultimately benefit our teammates and our customers.
I want to jump to a bigger topic that most investors are focused on, these tariffs. Again, from your perspective, I mean, what are you seeing from the tariff landscape and implications for Monro or maybe the auto service space broadly?
Yeah, I would say that obviously no company in the auto aftermarket and any sector can look at the current outlook and landscape without considering tariffs. It's obviously a little bit uncertain, right? We know we've got the auto parts tariffs in place currently, but there is a little bit of uncertainty in the tariff environment, not just from the permanency, but also from the response of various manufacturers depending on their manufacturing footprint. That being said, we are expecting it to drive cost increases against almost all of our major product categories. Because of that, we mobilized an internal team for negotiations with our top suppliers to try to mitigate as much as possible. We did make an announcement yesterday that we hired a Senior Vice President of Merchandising who will be onboarding and ultimately lead those efforts.
Whatever we are not able to deal with through those negotiations, we may need to adjust prices to our customers. You do that in order to counter the impact of any tariff-related cost increases. We are mindful of the impact on consumer behavior if the industry as a whole decides to pass cost on to the consumer. We have seen the impacts of that already on price increases of the consumer post-COVID, which has helped to kind of feed this trade-down dynamic and some of the promotional activity that we are currently investing in. We are evaluating what we think the full impact may be on both volume and mix and across the spectrum of potential tariff outcomes. Other than that, at this point, it is a little too early to give a definitive view.
At this point, have you started to adjust prices or are you still just looking at it?
I think we've been, if we look at our prices over the last couple of quarters, we've put some price in place because of base cost increases, right, outside of tariffs. We know that we've talked about mid-single-digit wage inflation that we've been contending with. We continue to look at our opportunities to price. We really have a robust system at which we look at the competitive set. We look at what our primary competitors are doing. We make sure that we're pricing accordingly. That'll be a consistent way that we look at the tariff increases as well. I think at this point, we're still in the early days of having those conversations with our suppliers about any potential for increases as well as the timing of those increases.
Got it. As far as, again, just sticking with kind of the repositioning of the business and a lot of what you're doing here, you talk about the closing of underperforming stores to continue to work on the in-store consumer offering. Especially from your seat as CFO, I mean, how much investment needs to, what type of investment do you think you need to put in the Monro organization, so to say, to support this ongoing repositioning?
Yeah, you know, that's been the thing with the repositioning is I think that it's less capital intensive in terms of dollar capital, but a little bit more human capital intensive. We're really focused on being able to get consistency of performance across our organization. The ConfiDrive digital courtesy i nspection was an investment that we made partnering with one of our existing technology partners to support a standardization of process across 1,000 stores. Those are the types of things that we're looking to deliver for our organization is how do we make it easier to create and to maintain and to hold people accountable to standard processes across all of our locations so we can deliver that local experience.
That being said, the capital investments of $25-35 million that we laid out in our last earnings call for FY 2026 is pretty consistent with what we've been doing historically. It relates to some maintenance CapEx, but also some technology projects that are supportive of that standardization. Overall, I think that the investments that we're intending to make are not so significant that the returns aren't so long to realize the benefits of those investments that we won't be able to deliver adjusted diluted EPS growth in FY 2026.
Look, the last topic I wanted to discuss dovetails on the topic we just had there. The last topic I wanted to discuss is cash. Your cash generation for Monro has been a positive. Maybe discuss kind of the sustainability of the cash generation and then how you plan to deploy to the extent you have excess capital.
Yeah, absolutely. We didn't give a cash flow kind of goal for FY 2026 other than we said that we'll have sufficient cash flow to meet our capital allocation priorities as well as maintain our low leverage profile. Those priorities include that $25-35 million of CapEx I just described. It's also we have about $40 million of principal payments on finance leases as well as a $35 million dividend at the current level. That's about $105 million of operating cash flow needed to cover those three capital allocation priorities. We expect that we'll be able to do that in FY 2026 and maintain that low leverage profile on the balance sheet.
Is there anything before we conclude? Is there anything that we did not discuss that we should have?
No, I mean, I think the takeaway really is that we've got some momentum in the short term here that we're continuing to build on and is supporting our business as we enter FY 2026. At the same time, we've got some medium to long-term things that we're working on related to the initiatives that will help support profitability as FY 2026 and top line as FY 2026 progresses. So we feel good about living into our expectations that we laid out on the last call of comp sales growth and adjusted diluted earnings per share growth in FY 2026.
Great. We once again appreciate your participation in our conference. Congratulations on the success here. I look forward to continuing to watch it unfold.
Thanks, Brian. Appreciate it.
Thank you.