All right. So last but certainly not least, happy to introduce Monro, which is one of the largest independent automotive service providers in the U.S., operating more than 1,100 locations, focused on tires, maintenance, repair services. The company's been working towards and making progress on strengthening execution, and we're excited about the initiatives in place and encouraged by the opportunity moving forward. So I guess as I get back to my seat, just start with a quick introduction on Monro and what some of the initiatives you guys are progressing on.
Sure. Why don't we start by introducing ourselves? I'm Peter Fitzsimmons, the President and CEO.
Hi, Brian D'Ambrosia. I'm our CFO.
Eddie and Brian, thanks for including us again this year in your program. Monro has been in the aftermarket business for nearly 70 years. We're in Rochester, New York, have been for that whole period of time, and we've grown steadily, especially from 1990 to about 2020, mainly through acquisitions, so that today we have 1,113 stores in 32 states. One of the benefits of some of the acquisitions is we've been able to expand our product offering. For example, 20+ years ago, we bought Mr. Tire and introduced Mr. Tire to the more service-oriented Monro stores and vice versa to the Mr. Tire stores. More recently, we bought stores in the West Coast, we bought Mountain View, we have a chain in the Midwest called Car-X.
W hat we stand for today is full-service auto aftermarket, which to me means we sell replacement tires and we provide preventive maintenance services, oil changes, brake jobs, ride control work, alignments, things that keep your car safe. I don't think that there are many other companies;, there are some, but not many, with the size and scale of our $1.1 billion in revenue business that provides full service. What we're really after is the customer who believes that we know what we're doing, and they trust us, and they will come to us for a variety of services over time. Some of the things that we're about to talk to as it relates to initiatives address the things that we're doing to encourage more frequent visits, and the type of customer that we think we best serve.
W e're a little over a year of the improvement plan that's kind of been focused on three main pillars, customer acquisition, merchandising productivity, and store excellence/selling effectiveness. As you look at those three pillars, where are you seeing the most benefit up to date, and then where are you seeing the most opportunity looking out into the future?
I've worked a career in performance improvement, and what I can say for sure in retail in the aftermarket is it's not one thing, it's a combination of things that really drives value. Let me start with the last thing you touched on, Eddie, which is store performance improvement. We have, as I said, stores across the country, different types of customers, and last year when we closed 145 stores, we immediately realigned the field, reduced the number of district managers from a little over 100 to 74, removed some of the administrative responsibilities from district managers, and have empowered them steadily, and even more so this year, to coach and train at the store level.
That has enabled us to reduce turnover in an industry that's famous for high turnover, which has then enabled us to continue to build stronger roots with our customers in every market we're in. We've got a couple of other things in our arsenal, I think, at the store level that matter. One is the ConfiDrive inspection tool. We're not the only business that does inspections, but I can tell you when they're done right, both thoroughly in the first place and then presented effectively to the customer, it educates the customer on what it is that they should be doing to keep their car safe.
While that was introduced 2.5 years ago, it's really been in the last year and a half that we've used it effectively to build ticket and educate the customer, and in many cases, get the customer to come back if they're not ready to take a service like a brake job, when we show them that they should be thinking about that. The other thing that I would point out in the store performance arena is our use of a very sophisticated analytical tool that's easy to use, and we call it, as you've heard us say on earnings calls, the DM Toolkit. The DM Toolkit provides you with a lot of input information. It's not a scorecard that tells you what your sales and margins were and what category results were.
It shows you where you might be benefiting from improving performance at the margin level by reducing discounts, by buying from the appropriate vendors. Then on the revenue side of the equation, what your average repair order size is and why it should be higher, what your attachments could be. Those things collectively enable us to deliver a better experience to the customer. I would say we started to get progress made on that in the latter part of last fiscal year. This is a year where that's really taken hold. We've commented most recently on our earnings call about rolling it out to 340 stores, and that in approximately 150 of them, we saw nice results in the second quarter, the quarter that just ended in September.
Where we saw increases in those 150 stores, or 10% of our whole chain, with increase in sales in the 4%-6% range. You know we had negative comps, so we significantly outperformed other stores in the network. But also an increase in bottom-line performance by 20%. That's been rolled out to more stores. It's available to some of our best stores, and I feel pretty confident that the combination of the inspection tool and the DM Toolkit will consistently drive better performance in the stores. That's one of the three initiatives. The second one, which we've talked a lot about, is marketing. I think the company under-invested in marketing for two or three years, and when we started last year after doing our diagnostic, we immediately, in July, began to invest in digital marketing.
It's basically Google Search, and it enables us to reach potential buyers, mainly tires and oil. W e're not the only ones that use this, but it's effective. From July of last year, we saw a steady increase in calls, sales, and gross margin dollars. We've continued that effort, even though some of the sales results haven't been as strong this year, because it's generating new customers and new traffic. I think it's over time, from my experience, that marketing really takes hold. The second thing that we've done in the marketing area is invest in customer relationship marketing, CRM, and that's geared to getting existing customers to come back into our stores more frequently. We can be really targeted now.
For example, we've done an inspection for someone who came in for an oil change and suggested that they should be thinking about doing a brake job. We can then reach out to that customer with a phone call, with an email, possibly with a text, to encourage them to come back into our stores. I'm sure everyone here has had that experience with some other retailers, but it works, and it's a way, particularly when you can start with the facts of a good inspection that includes photos, that over time can drive that frequency of visit that we're after through CRM. Many ask us, "Your SG&A is higher," and a major reason why it's higher is we're going to continue to invest in marketing, because I think that's what's going to drive new traffic as well as more frequent visits by existing customers.
Third initiative that is important to creating value for our customers is merchandising, and starting with several hires in merchandising last year, Katy Chang as head of merchandising, and then a leader in tires and a leader in parts who's joined us only more recently. I think we've been able to reset our in-store offerings by working well with all our vendors. I can tell you I've seen a lot of them in the last 24 hours, and over the next two days, I'll see even more of them. You've heard us talk about the improved tire assortment. We now have the right brands in each of the tiers of tires, one, two, three, and four. We've added Continental and Pirelli to Tier 1. Both have performed very well for us and have enabled us to hold our own or do better than market in Tier 1.
The other end of the spectrum, we introduced an opening price point tire in February, March called Vantage. This is a tire that's geared towards the price-sensitive customer, and in a year in which certainly tire customers have been a little bit more careful about how they spend their money, it's enabled us to capture that type of customer, as well as use the sequence of tires in each of the tiers to get the customers to appreciate value of a slightly better tire, which is really an objective of any tire seller. That was an effort that started last year and was particularly important in the first quarter of this year. Now, with an additional resource in parts, we're applying that same assortment improvement to parts, first with batteries.
You may have heard us say that our battery performance was significantly stronger in the second quarter as it was in the first quarter. We've got a better assortment of batteries. I know that seems like a very basic product, but there is a difference, and we've priced it better, because we have a better assortment. We are right now in the midst of amending our brakes assortment, and I think that the brakes packages that we'll be offering our customers will be geared to everybody's needs, from a simple job to a much more complex job, and we'll have the right type of brake part in the shop for that customer.
Our objective is to have the part in the store if we sell it, but one of the great things about our business is we have a distribution system, both with tires and parts, that enables us to get whatever we need in a very short period of time. Having the product in store enables us to serve the customer efficiently when they come the first time, but having access to whatever we need enables us to serve almost any customer. All of those things have been important to improving the infrastructure of our business that I think will position us very well as time passes to capture market share and return to positive comps. We've been negative in the last couple of quarters. We know it. It has been a tougher market this year than last year.
One of the things that any company like ours has to do is make sure that you're taking advantage of times that are a little bit softer to position your infrastructure for continued success in the long run. You were asking me about strengths and opportunities. Let me see if I can quickly think of one for each. Certainly in marketing, we've been able to expand the number of new customers coming to the stores. I think the opportunity there is to further refine the CRM approach so that we're really hitting the customers that we know are likely to need something at the right time to draw them back into the stores. In merchandising, I think we can probably continue to have a better in-stock position. It's pretty good now. Above average, I would say, compared to where we were before.
Over time, when you're using things like the DM Toolkit to coach our store teammates on what to buy and where to buy it from, you can increase your margin by going to your preferred vendors 100% of the time. So there's an upside to having an ability to access the merchandise that can ultimately drive a new sale, and that's part merchandising and part store performance. As I said, I think that the performance in the first tranche of stores that we applied all of our extra help to is very encouraging, and I think rolling it out to a larger subset of the overall portfolio will be important to having many more stores get the benefit of managing your margin and also driving incremental sales. I'll stop there.
That's all very encouraging, and I'm looking forward to the success we see with all three of those initiatives. Just turning to some of the current environment dynamics, I was just, can you talk about the current health of your consumer, where you're seeing some pressure, where you're seeing some light, and what your sense is on the pent-up demand dynamic, as we have seen some deferrals in the larger ticket items like tires and brakes?
Sure. I think that in the first and second quarters, turmoil in the Mideast, which led to higher gas prices, higher food costs, higher healthcare costs, meant that some of our customers, not all of them, but some of our customers are feeling more economic pressure. Then you've got to choose between which non-discretionary product are you going to spend your money on. And where we've seen that show up in our results in the last two quarters would be some purchase of fewer tires. So instead of buying four, you buy two. In some cases, a trade-down from a Tier 2 tire to a Tier 3 tire, or from a Tier 3 tire to a Tier 4 tire, because even though you know there's a tire that's probably better for your car, you're going to settle for something that's a little bit more affordable.
On the deferral point, the inspection tool often shows that you really ought to think about replacing your brakes. People just don't always do it right away, and it's deferral of those higher-ticket purchases and services, and a brake job would cost somewhere between $500 and $700 on average, but could be as much as $1,000. More customers in the last couple of quarters who've said, "I'm just not going to do it now. I'll do it later." That's future revenue, and if we use the tools available to us, including the inspection tool and reaching out to customers who have declined the service, it can create near-term revenue. I think we saw a little bit of a lift in the market in September and October.
If you were listening to our earnings call or read the transcript, you will remember that we saw flat sales in September and October, which was a lift from where we were in the summer, and every analyst report I've looked at has suggested that there was some softness in the summer. We're now entering a season where people, once it gets a little bit colder, will need more tires and services, so there's a near-term opportunity. I don't know if it's going to be November, December, January, or when, but that's something that we're always excited about. Last year, we were very well positioned for winter, and I think we are again now. We just don't know exactly when winter's going to start.
We expect that the market will be up and down, but we're encouraged that the things that we're doing will create incremental revenue, and potentially in the not-too-distant future.
When looking at results, tire volumes have been a source of outperformance for you, and you've indicated that maybe there's some share gains there in certain tiers of the tires. Talk about how some of the initiatives have led to that outperformance in volume, but then on the contrary, what you're seeing in terms of mix there, and how you can use your promotional activity as a lever to spur on some incremental volume.
Sure. For the industry in calendar 2026, unit sales have been down 1%-2%. For us in calendar 2026, we're flat. We've seen a barbell effect with good sales in Tier 1 tires, we think a little bit better than market, and importantly for us, a significant increase in Tier 4 tires. We've said publicly that this year, our overall tire units have been about 1/3 Tier 4, whereas last year it would have been about 25% Tier 4. So there's been an increase in the more price-oriented tire for us, and I think that that's generally true. In fact, I think the industry is also at about 1/3 of its tires in Tier 4. The industry over time can perform better in Tier 1, 2, and three. Until this year, including last year, I think we performed quite well at that level.
I think our collaboration with brands helps us sell tires. I'll give you two examples, and what I like about both of these examples is that it emphasizes what we want to stand for, which is not just tires, but service. In the summer, we had excellent support from Continental, who enabled us to run a promotion that was free alignment, free oil change with the purchase of four Continental tires. It was fabulous. They had a terrific outcome, wildly exceeding their expectations, and we were able to present to the customer that we were more than just tires, we were tires and service. We had good partnership and marketing support from Continental on that, so it was their dime. Similar experience recently with Nexen, where they also offered a free alignment and a free oil change with the purchase of four tires. Similar outcome.
I point that out because it makes two things clear. I'm sorry if I'm repeating myself. One is that those brands want to partner with us, and they're willing to invest marketing dollars to support us when they see that our results are better than some others. Second, that it presents to our customers that we're more than just a tire service or an oil change business. We're a full-service aftermarket seller.
Brian, maybe to get you in the spotlight here, touching on some of the balance sheet aspects that you guys have announced recently. Maybe just touch on the new credit facility, what the proceeds were used for, and then why Ares was the right partner.
A bsolutely. Thanks for the question. To recap, we have recently refinanced our credit facility. Our previous credit facility matured on November 10, 2027, going current November 10, 2026. We refinanced it on October 23 with a $375 million credit facility, which consists of a $250 million term loan and $125 million revolver with Ares. It is a four-year agreement that goes through October of 2030, and it fully pays off the existing credit facility. To your question about proceeds, we had about $100 million of outstanding on our previous revolver, $100 million of the $250 million term loan was used to pay that off. In addition, the remaining proceeds from the term loan, about $153 million, was used to pay off balances owed on our supply chain finance facility.
That would be a reduction of accounts payable and an increase in the term loan. We think that Ares is a great partner for us, provides us a lot of flexibility to operate our business, both from a covenant standpoint, but also doing it with a partner who has experience in the auto aftermarket, and also provides a very sophisticated and tailored private credit solution for us. We had plenty of options as we looked to refinance the credit facility, including our more traditional bank lenders and various different private lenders. But ultimately, Ares provided us with the best solution for what we felt were our needs.
Our needs really were focused on creating a stable financing backdrop for us over our planning horizon, enabling us to not only execute our growth strategy, but providing flexibility for us to explore a wide range of the alternatives that we are currently evaluating. We think that this credit facility accomplishes all of those things. We did guide that with the higher term note and higher outstanding under the facility, primarily related to the unwinding of the supply chain finance facility, as well as some wider spreads on the new facility versus the old facility, that our interest expense would increase. In FY 2027, we guided that to be between $28 million and $32 million for this current fiscal year ending in March. That really allows us to, like I said, continue the execution of our strategy.
With this in place, it allows us to focus with an aligned lending partner on what we're looking to accomplish.
Brian, if I could just follow up on that. As you looked at redoing the credit facility, was it necessary to replace the supply chain financing? I guess is one question, or could that structure have stayed in place? Secondly, one of the questions I'm getting a lot, and I don't have an answer, so I'm going to ask you, is you just look from a cost of capital standpoint. How does this new facility, all in, from a cost of capital, compare to the structure you had previously?
I'll answer the second question first. It obviously increases our cost of capital because we're moving working capital. The company had a significant negative working capital position. We talked about our AP to inventory ratio being 190%. That has been unwound with this new credit facility, and so the business is being not funded with that negative working capital. It's being funded through our funded debt, and obviously, the funded debt has those SOFR plus, at this point, we're at SOFR plus 625 on the term loan, and that was previously in accounts payable, obviously with no interest. So it increases the cost of capital.
The rationale for collapsing the supply chain finance facility was, as we moved through the value equation process, it became clear to us that the proposals that we were the most serious about and had the best term for us, and provided us with the most stable long-term financing, included an unwinding of the supply chain facility. So for us, that was an aspect that we knew was going to increase our borrowing costs, but at the same time, was the trade-off we needed to make in order to ensure that we had a stable, structured four-year deal for us to execute our operating strategy under.
Yep. I think just in the interest of time, we got to hop here. Peter, Brian, thank you very much for taking the time to be with us today.
Thanks, Brian.
It has been a story that has been evolving, and I think a lot of the pieces are in place over the course of the next 12 months, maybe with some tailwinds from the macro for you all to really show the amount of work that has been put into this business. T hank you very much for coming and wrapping up our 50th year.
You are welcome.
Right. Thanks for having us.
Thanks for including us again. Thanks, everybody.
Thank you.