Good morning, ladies and gentlemen, and welcome to Monro, Inc’s Earnings Conference Call for the Third Quarter of 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 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'll spend the first part of our call this morning outlining a series of customer focused initiatives we recently implemented across our store base. These initiatives will enable us to drive additional sales of our higher margin service categories and position us as an even stronger competitor in every market we serve. After that, I'll walk through our third quarter results and the continued progress we've made despite inflationary pressures impacting the consumer and our business. I'll then conclude with an update on our cash creation and capital allocation. Before I get started, I would be remiss if I didn't recognize and thank all of our teammates for their tremendous efforts in serving the needs of our customers in the communities where we operate. Now starting with a series of customer focused initiatives we recently implemented across our store base. While batteries currently represent a small fraction of our overall sales, the battery market is large and growing. In response to this, we have made changes in the way we sell and service batteries. We now offer free battery checks and in departure from industry standards, we are waiving installation charges for most batteries. Our customer safety is our primary concern and when we install the battery, it gives us an opportunity to assess a vehicle's entire electrical system through a free quality courtesy inspection to ensure that everything is in good working order. We know that our customers are busy and they value convenience, personal service and purchasing options tailored to their needs. To meet these demands, we've rolled out several enhanced offerings, including a walk in oil service option to provide hassle free service, which is in addition to our existing online employment system. Number two, a good, better, best oil…

Thank you, Mike, and good morning, everyone. Turning to slide eight, sales decreased 1.9% year-over-year to $335.2 million in the third 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 $28 million in the prior year third quarter. Comparable store sales increased 5.6% and sales from new stores increased $6 million. When adjusted for one additional 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 4.4%. Gross margin decreased 150 basis points from the prior year to 33.8%. A higher mix of tire sales in our retail locations, customer trade down to opening price point tires, as well as parts inflation that we intentionally did not fully pass through to the consumer increased material cost as a percentage of sales from the prior year. In addition, incremental investments in technician, labor and wages to support current and future top line growth increased labor costs 80 basis points from the prior year. These increases more than offset the benefits to gross margin from the divestiture of our wholesale tire and distribution assets. Total operating expenses were $89.6 million or 26.7% of sales as compared to $93.1 million or 27.3% of sales in the prior year period. The decrease as a percentage of sales was principally due to prudent cost control, which allowed us to leverage operating expenses on mid-single digit comparable store sales growth. Operating income for the third quarter declined to $23.8 million or 7.1% of sales. This is compared to $27.4 million or 8% of sales in the prior year period. Net interest…

Thanks, Brian. We're optimistic about our outlook for the remainder of fiscal 2023 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] Thank you. Our first question for today comes from Brian Nagel Oppenheimer. Brian, your line is now open. Please go ahead.

Hi, good morning.

Good morning, Brian.

Good morning, Brian.

Thanks for all the color. So, a couple of questions. I mean, first off, just with respect to the underperforming stores and now we've seen some -- for a trend in improving performance. How much potential is left in those stores for the outsized comp growth we've seen?

Brian, good morning. It's Mike. I would say that it's part of our strategy. Just to remind everybody that was year-over-year-over-year declines that we are now starting to reverse. So I would look at the strategy as the exact opposite. We're actually walking these stores back year-over-year-over-year. So my expectation and I know my field team understands the expectation that we're expecting double digit comps to really start reversing. And we expect this type of growth for our, I would say, the next one to two years going forward.

Got it. That's helpful. And then my second question -- Mike, it is my follow-up question. Maybe I'll merge a couple together, but -- so as you look at the results today, you're calling out this kind of shift in buying patterns as a result of, to some extent, consumers trade down amid economic pressures. So the question I have is, as you look at that, a better demand for to gets these more opening price tires, what gives you the confidence that this does in fact reflect market share gains as opposed to potentially existing customers now just reacting to a more expanded product offering as part of Monro?

First of all, we look at syndicated data and we actually can see the breakdown based on Tier 1 through Tier 4 performance based on tires, opening price point being Tier 4, premium tires being Tier 1. So I can actually see our performance by tier. Now when I look at our performance right now, Brian, this is what we're focused on from the day we've been on this call together is, sales margin and cash creation. We are now finally seeing with our -- really with our partnership with ATD we're actually seeing real tire unit creation. And it's not just because we're -- I think we have a better assortment for our customers. And that started with really activating on opening price point. But our greatest opportunity that we have is, obviously, through field execution and part of field execution's job is to really take that opening price point opportunity and sell up through the screen based on the features, benefits and advantages. But ultimately, what drives us is market share. We can see the activities that we're deploying the stocking decision, the assortment, the pricing decisions and it's coming to life in unit gain in the markets that we serve. And I think that is the successful [indiscernible] for years to come.

That's very helpful. I appreciate it. Thank you.

Thank you, Brian.

Thank you. Our next question comes from Daniel Imbro of Stephens Inc. Daniel, your line is now open.

Hi guys. This is Joe Enderlin on for Daniel. Thanks for taking our question.

Of course. Good morning, Joe.

So it looks like the three year stack from monthly comps accelerated sequentially from December to January pretty meaningfully. Could you maybe provide some color on how you think the consumer is receiving the increased promotional activity right now and maybe how that trended through the quarter?

Joe, I'll take that one. I would say that just on the promotional activity, very clearly what we did is, we executed using our supplier partners' promotional activity similar to really our competition in the marketplace. So we are very disciplined in our approach using our vendor support to be able to drive and attract customers through pricing incentives. I would say, going forward from December into January, I'm actually pleased with, although we had a very strong December in tires driven by tires, and you can see that in my margin. But in January, it actually flipped where I had a very strong break month. So ultimately, January is not a trend, but I actually like to see how we're meeting our customers' needs, not just on tires, but also in our service categories. And I believe most of that's just driven through all the activities that we're deploying at the local level. We're really -- we're leading the customers, not just with tires, but also service categories. And just to really just go back to the fundamentals of this business. We have to have a balanced approach. We have to have tires growing and our service categories growing, brakes leading that service category for us to really drive profitable sales.

That's super helpful. Thank you. And then maybe as a follow-up, could you maybe provide some thoughts on not this year, but maybe the long-term SG&A growth rate or margin if you are comping at your mid-single-digit comp goal?

Yes, this is Brian. I would say that as it relates to kind of our outlook, maybe just for Q4, we expect some improvement in our gross margin level somewhere between where we ran in Q2 at 35 -- mid-35 and where we ran here in Q3, which is just south of 34. So we expect to trend somewhere in that range, improvement off of Q3, though. The gross -- I'm sorry, the SG&A, we expect to be about flattish year-over-year. We have a little bit lighter of a volume month or volume quarter in Q4 historically based on seasonality. So we delever a little bit from where we traditionally run in Q3. As it relates to the long term, we're not providing longer-term guidance. But as we've been -- as we've said, as we achieve our mid-single digit comp growth, we expect to improve both margins as well as leverage our fixed costs and SG&A. And we think that, that gives us a good path to return our operating margins back to where they've run historically, certainly double digits.

Got it. Thanks so much guys. That’s all from me.

Thank you, Joe.

Thank you.

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

Thank you. Guys, I wanted to dive in a little bit more about the supply side of things. One of the things that surprised me a little bit is you guys talking about the manufacturers may be giving you some more support and rebates on things. So I would just love to kind of hear kind of what you have seen there or maybe how that's changed? And could that actually begin to buffer gross margin later this year? And are you starting to see or at least this calendar year -- are you starting to see manufacturers roll back any price increases or go beyond just giving you maybe some support on the sales side in the field?

John, I'll take care of that. I'll take that one. It's Mike. I think it's less about the manufacturers. It's all about Monro. We were -- as we really become a bigger customer with fewer suppliers, they're investing behind us. And that's not only on the tire side, but the parts side. So what we deployed in the fourth quarter is really we took advantage of what they normally have in the marketplace for our competitors, but Monro really stepped up, activated against it, really partnered with fewer suppliers, and we just became more relevant. And it really benefited us. On top of that, we actually lived into what we committed to. We deployed tires. We really gave our teams the assortment that they need to compete in the marketplace. We kept them in stock. And these are the things that our suppliers are looking for from a large customer like Monro. So I really have to give credit to not only the field team, but the merchandising organization, our inventory teams really making ourselves getting ourselves ready for basically a winter season that came over 10 days.

Great. And then I just want to ask just -- I feel like the commentary on the M&A pipeline was maybe a little bit different than I was expecting. So I just love to hear what you guys are seeing there? Is it sellers come to you? Are you looking at anything that maybe would be bigger in size than what you've kind of normally looked at? Or just kind of -- any color on how the M&A pipeline has seemed to fill up here, because I thought maybe we were taking a little bit more of a conservative tone there, at least -- that's what I thought at least.

Yes. No. I mean there's really -- as we look at our M&A opportunity, the activity that we've been working, we have more than 10 NDAs signed. We continue to evaluate deals. We've always been a very disciplined financial buyer. And I think adding to that now, we're a very disciplined operational buyer, meaning, that we're going to take on stores that have a really clear path to quick accretion for us with limited kind of investments in our team's time for needing to improve those stores immediately. We have a lot of focus on our bottom 300 stores like we talked about. We need to continue that focus. We have a real focus on improving our business, delivering those mid-single-digit comps and improving our profitability across all of our categories. So with that focus, we want to be really disciplined in our acquisition approach. We had a deal that we announced this quarter. It was one of those that met all of the criteria that allowed for a nice acquisition and a nice integration, and we look forward to closing that in Q4. But there will be continued M&A as we move forward for the deals that make sense for us operationally and financially.

Great. Thank you guys.

Thank you.

Thank you. [Operator Instructions] Our next question comes from Bret Jordan of Jefferies. Bret, your line is now open.

Hi, good morning, guys.

Good morning, Bret.

To adjust for, I guess, sort of a lot of the pricing moving pieces, do you have a day adjusted car count comp that we could look at just sort of to think about traffic versus the lower price point tires and sort of the other moving parts?

Yes. We don't provide -- we have provided kind of a traffic number even unadjusted for days. So the quarter was continued to be led by ticket. And tire units, we said were positive. Those were positive, both reported and adjusted.

Okay. And then, I guess, it sounds like the January service has picked up. But did you see anything sort of structural in the demand for the service side of the business? Was it either a feeling that maybe the surge in the prior year or pull forward or lack of weather or anything drove the negative service comp? Or is it just more focused on tires in the quarter, but service picked up in January?

I would say that it's a continuation of our strategy. I mean, we've been talking a lot about service over the last years, so having a balanced approach. I'd like to not talk so much about January because it's only one month, and there's a lot of things changed. So like when we talked about last quarter, October, had a strong service component. This will be a really important quarter for us as we continue to get this mix right. December was very strong in tires. I would say that we could potentially be going against a soft January from last year. I'm happy to see a double-digit growth in brakes. And that is the expectation going forward is continue to get the balance right. And I like that double-digit number, especially in the service categories.

Okay. And then the housekeeping question. Brian, could you give us the monthlies? And is there any regional dispersion to talk about?

Yes. From a regional standpoint, all regions were up, a little bit weaker in the West, but not too meaningful. As it relates to the monthlies, 3.7% in October, 3.5% in November, 10.5% in December as reported, and that gets you to the 5.6%. December would have been 6.5% if you're looking at the 4.4%.

Okay. Great. Thank you.

You are welcome.

We have no further questions for today. So I'll hand back to CEO, Michael Broderick for any further remarks.

All right. Well, 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.

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