Monro, Inc. Q1 FY2021 Earnings Call

Good morning, everyone. Welcome to Monro, Inc.’s Earnings Conference Call for the First Quarter of Fiscal 2021. Currently, all participants are in a listen-only mode. We will have a question-and-answer session later, and instructions will be provided at that time. This conference call is being recorded and cannot be reproduced in any form without the company's permission. I would now like to introduce Ms. Maureen Mulholland, Senior Vice President, General Counsel and Secretary at Monro. Please go ahead.

Thank you. Hello, everyone. Thanks for joining us on this morning’s call. Before we get started, please note that as part of the call this morning, we will be referencing a presentation that is available on the Investors section of our website. If I could draw your attention to the Safe Harbor statement, I’d like to remind participants on this morning’s call 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 and include the significant uncertainty relating to the duration and scope of the COVID-19 pandemic and its impact on our customers, executive officers, and employees. The company disclaims any intention or obligation to update or revise any forward-looking statement whether as a result of new information, future events or otherwise, except as required by law. Additionally, on today’s call, management statements include a discussion of certain non-GAAP financial measures, which are intended to supplement and not to 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 our President and Chief Executive Officer, Brett Ponton. Brett?

Thank you, Maureen, and good morning, everyone. Thanks for joining us. In the last few months, we have seen an unprecedented health and economic crisis and the COVID-19 situation remains extremely fluid. During this period of uncertainty, we have been committed to ensuring the safety and well-being of our teammates, customers, and communities while maintaining business continuity to support our customers’ current and future needs. Our more than 1,200 stores have remained open to provide essential services since the beginning of the pandemic and we continue to leverage our diversified supply chain without significant disruption. I am immensely proud of our teammates’ efforts and strong execution despite the ongoing challenges and I am pleased to see that our Monro.Forward initiatives continue to gain traction, which I believe will help us emerge stronger from this crisis. As highlighted on slide three, while we reduced our store operating hours at the onset of the pandemic, we have taken a measured approach to gradually return to a more normalized store schedule as the demand environment improves. We have received positive feedback from our customers regarding the safety measures we have implemented in our stores, including key drop and contactless services. Importantly, we continue to see strong teammate engagement as a result of the actions we have taken to protect and support them during this crisis. Overall, we are focused on the elements of our business within our control and have taken the appropriate steps to mitigate near-term headwinds and expect to operate on a cash flow positive basis during the COVID-19 pandemic. Our strategy is underscored by rigorous financial discipline and cost management, capital allocation, as well as a robust balance sheet and ample liquidity, which we believe provides us with significant financial flexibility to safely operate our business and execute our Monro.Forward initiatives. In this context, we have continued to make critical investments in technology to support our future operations and have decided to gradually resume our store rebrand and reimage initiative in the second quarter. Lastly, acquisitions remain a pillar of our growth strategy. We have a robust pipeline and are evaluating a number of quality potential targets that would fit our strategy while maintaining strong financial discipline. Moving on to slide four, I would like to take a moment to discuss our first quarter performance and our current trends we are experiencing. Government restrictions to curb the spread of COVID-19 drove a substantial decline in traffic, which translated to a 26% decrease in comparable store sales in the first quarter. While April represented a low point in our top line performance, we saw a resumption in demand driven by improved traffic, as government restrictions gradually abated throughout the quarter with May and June improving sequentially. These encouraging trends continued into fiscal July with our comparable store sales down approximately 12%. Despite the COVID-19 related challenges we are facing, it’s important to note that we continue to solidify our competitive position in the current environment as evidenced by our performance tracking in line or above miles driven and other mobility metrics. While we experienced a double-digit comparable store sales decrease in all product and service categories during the first quarter, we were encouraged to see that monthly comps improved sequentially across all categories throughout the quarter, a trend that has continued in the second quarter based on our preliminary results to date. Importantly, tires, which represent our largest category, outperformed all other product and service categories as the rollout of our tire category management and pricing system is gaining traction. With improved visibility into the price elasticity of demand and competitive dynamics in each market, it has allowed us to optimize our tire assortment, while favorably impacting tire volumes and margins during the first quarter. Geographically, our southern and Midwestern markets outperformed our northern markets where we have had a high concentration of stores as the northeast region was the most severely impacted by the COVID-19 pandemic during the first quarter. However, this outperformance has narrowed in recent weeks with strengthening performance in the northeast and a slowdown in recovery pace in our southern states as many are increasing restrictions due to higher infection rates. As mentioned before, we are also able to quickly and thoughtfully flex down our cost structure to adapt to the lower demand environment. The pandemic gave us the opportunity to accelerate the pace of some of our transformation initiatives including our store staffing. We believe we have right-sized our store staffing and structurally changed our labor model to consistently have the right mix of technicians with the appropriate skill level and corresponding compensation aligned with demand and the level of services performed in each store. In addition, we have tightened our marketing spend and accelerated its shift towards higher ROI digital channels. Overall, we are encouraged by the cost savings that derive from these initiatives, which we believe set us up well to drive better operating performance going forward. Despite the challenging operating environment, we are strongly committed to advancing our Monro.Forward strategy to position our business for long-term sustainable growth. Turning to slide five, I would like to discuss the recent developments in greater detail. Beginning with our largest strategic initiative, our store rebrand and reimage program, which focuses on creating a more consistent store appearance and implementing standardized in-store operating procedures. To date, we have completed the transformation of more than 200 stores in a number of key markets, including rebranding approximately 70 stores from service-branded stores, tire-branded stores, and consolidating our tire brands to optimize our brand awareness and increase our tire revenues in select markets. While we have paused this initiative since the onset of the pandemic, we are pleased to report that our rebranded stores' comparable store sales continued to outperform our chain average. These positive trends reinforced our confidence in our reimage and retail brand portfolio consolidation strategy to drive long-term same-store sales growth. In light of our healthy financial position, we have decided to resume this program with a measured and moderated approach in the second quarter. Accounting for the current pandemic backdrop, our goal is to undertake the refresh of 60 to 120 stores in fiscal 2021. As part of our one-time real estate portfolio adjustment, we completed the closure of 36 underperforming stores during the first quarter, in addition to the six stores that were closed in the fourth quarter of fiscal 2020. As we previously noted, these store closures were planned in accordance with our analytic model to drive a stronger long-term performance of our company and were not in response to COVID-19. We estimate the closure of these 42 stores will improve operating income by approximately $5.1 million on an annual basis. Moving on to our customer-centric engagement initiatives, over the past few years, we have been focused on improving the experience for our customers, which has driven our all-time star rating up to 4.6 stars. Building off these strong results, we have accelerated the strategic shift of our marketing efforts towards higher ROI digital channels since the beginning of the pandemic. As part of our digital strategy, we have been focused on optimizing our SEO performance for key product categories like tires. These efforts have resulted in approximately 50% of our stores now ranking in the top three online search results, which has led to significant improvements in online consumer actions, whether that’s scheduling an appointment at the store, making a phone call to the store, or clicking the get directions to a Monro location. Importantly, our targeted investments in digital marketing and advertising combined with our new digital phone system allow us to acquire and retain customers at a lower cost while driving stronger results. As part of our broader efforts to create an omnichannel presence for our company, we are excited to announce that we have completed the rollout of our collaboration with Amazon with all of our more than 1,200 locations in 32 states now providing tire installation services. We continue to receive positive feedback and strong customer satisfaction metrics in response to this initiative, which builds upon the success of our other online tire retailer agreements and is an important step in furthering our customer-centric engagement efforts. Turning on to our critical investments in technology, we continue to make tremendous progress on a number of initiatives that we believe will be instrumental in driving long-term sustainable topline growth and margin expansion. During the first quarter, we substantially completed the rollout of our network infrastructure upgrade across our store base, including the new digital phone system I just mentioned. Our modernized store infrastructure allows us to drive a more sophisticated and consistent approach to customer execution with the ability to measure the results of our marketing efforts. During the COVID-19 pandemic, we have leveraged our new technology to establish a centralized call center that provides added flexibility and significantly improves our customer responsiveness. Overall, we are encouraged by the early traction of this initiative and confident it will contribute to improved conversion and enhance customer experiences going forward. As mentioned earlier, we are in the process of rolling out our new tire category management and pricing system across our store base, which we expect to complete by the third quarter of fiscal 2021. This new tool is driving relative strength in our tire category as we are better able to dynamically track demand trends at the market level and make rapid adjustments to our pricing and assortment strategy. This allows us to drive higher volume, as well as optimized tire pricing to expand margins in this category. Lastly, our technology-based store staffing model has allowed us to seamlessly right-size and effectively balance our store labor in real time since the beginning of the COVID-19 pandemic, ensuring we have the right mix of skills to match demand in each store. It is also proving critical to our ability to effectively ramp up staffing in our stores to support improving demand trends, which is one of our important priorities right now. This program positively impacted gross margin in the first quarter and we are confident it will continue to drive significant store labor efficiency going forward. As we are rolling out our cloud-based store staffing and scheduling software across our store base, which we expect to be complete by the third quarter, we are leveraging our Monro University platform to train our teammates and have received overwhelmingly positive feedback so far. In addition to supporting the rollout of our strategic initiatives, Monro University has a robust curriculum and continues to help our teammates grow and advance their career in technical skill sets, which has significantly enhanced our employer value proposition as a key differentiator in the current environment. Overall, we believe these important tools will enhance our competitiveness in the marketplace and will be critical to supporting our broader strategy moving forward. Before passing the call over to Brian, I would like to reiterate how proud I am of our team’s dedication to safely provide a best-in-class experience to our customers. Our teammates have demonstrated their ability to quickly adjust to the evolving environment and seamlessly embrace the structural changes we have made across our business to drive and improve operating performance and emerge even stronger when this crisis subsides. With that, I will turn the call to Brian, who will provide additional detail on our first quarter performance and strong financial position.

Thank you, Brett, and good morning, everyone. Turning to slide six, I’d like to provide a more detailed overview of our performance this quarter. Sales fell 22.1% year-over-year to $247.1 million, primarily driven by a 25.8% decline in same-store sales. As expected, the ongoing COVID-19 pandemic substantially impacted our results, as government restrictions to curb the spread significantly decreased traffic in the quarter. As Brett noted, we were encouraged to see sequential comparable store sales improvement during the quarter across all product and service categories, as restrictions have gradually abated in some of our key geographies. Sales from new stores increased by $12.7 million or $11.1 million from recent acquisitions, partially offset by a decrease in sales from closed stores of approximately $3.1 million. The first quarter of fiscal 2021 had 90 selling days in line with the previous year period. Gross margin decreased 500 basis points to 35.4% in the first quarter of fiscal 2021 from 40.4% in the prior year period. This decrease was primarily due to an increase in distribution and occupancy costs as a percentage of sales, as we lost leverage on these largely fixed costs with lower comparable store sales. Additionally, we were impacted by lower vendor rebates due to slower inventory turns, as well as a higher sales mix of tires compared to the prior year period. However, this was partially offset by lower technician labor costs as a percentage of sales directly related to our store technology-based staffing model, as well as right-sizing labor to match lower demand, while ensuring we have the right mix of necessary skill sets in each store. In addition, gross margin improved within the tire category, which was positively impacted by the partial rollout of our tire category management and pricing tool in the quarter. Operating expenses for the quarter decreased $15.7 million to $76.1 million or 30.8% of sales, as compared with $91.8 million or 28.9% of sales for the prior year period. As Brett previously mentioned, we took targeted action to streamline our cost structure in the first quarter, most notably, we strategically realigned our marketing spend toward higher ROI digital channels and right-sized store staffing to match lower demand. The year-over-year decrease in operating expenses also reflects lower expenses from a net reduction of four stores compared to the prior year period. This was partially offset by $2.5 million in store closing costs. The increase in operating expenses as a percentage of sales compared to the previous year was driven by a decrease in comparable store sales. Our operating income for the first quarter was $11.4 million, compared to $36.4 million for the same quarter last year. As a percentage of sales, operating income was 4.6%, compared to 11.5% in the prior year period. Net interest expense for the quarter increased to $7.4 million, as compared to $7.2 million in the same period last year. The weighted average debt outstanding for the first quarter increased by approximately $486 million compared to the prior year period. The increase was primarily related to an increase in debt outstanding under our revolving credit facility to fund the purchase of our acquisitions and to provide financial flexibility during the COVID-19 pandemic, as well as an increase in finance lease that recorded in connection with our fiscal 2020 acquisitions and greenfield expansion. The weighted average interest rate for the first quarter decreased by approximately 350 basis points year-over-year due to lower LIBOR and prime interest rates, as well as lower borrowing rates associated with new leases. For the first quarter, income tax expense was $1 million, compared to $6.8 million in the prior year period. Net income for the first quarter was $3 million, compared to net income of $22.6 million in the prior year period. Diluted earnings per share for the first quarter of fiscal 2021 was $0.09, compared to diluted earnings per share of $0.67 in the first quarter of fiscal 2020. Adjusted diluted earnings per share for the first quarter of fiscal 2021, a non-GAAP measure was $0.15, which excludes $0.06 per share of store closing costs. This compares to adjusted diluted earnings per share of $0.69 in the first quarter of fiscal 2020, which excluded $0.01 per share of costs related to Monro.Forward initiatives and $0.01 per share of costs related to acquisition due diligence and integration costs. As of July 29, 2020, the company had 1,247 company-operated stores in 97 franchise locations, as compared with 1,251 company-operated stores in 98 franchise locations as of June 29, 2019. During the first quarter, we closed 36 stores. A complete bridge comparing our first quarter fiscal 2021 earnings per share performance with the same period last year is presented on slide seven. The COVID-19-related drop in traffic significantly impacted our performance resulting in a 25.8% decrease in comparable store sales and a $0.77 earnings per share decline. As we have previously noted, every 1% decline in comparable store sales translates into roughly $0.03 per share per quarter. The decrease in gross margin impacted our operations by approximately $0.20 per share. The net benefit of our cost savings and lower expenses due to a reduction in the number of stores compared to the prior year period allows us to reconcile to our adjusted earnings per share of $0.15 in the quarter. As previously noted, this excludes $0.06 per share in planned store closing costs. Turning to slide eight, I’d now like to provide an update on our strong financial position beginning with our capital allocation strategy. We paid down $240.2 million of debt on our revolving credit facility in the first quarter of fiscal 2021. Our capital expenditures were $15.3 million in the first quarter, of which approximately $9.9 million was related to our Monro.Forward initiatives, including our store technology infrastructure upgrade. Additionally, we paid approximately $7.4 million in dividends during the first quarter. As Brett previously noted, we have a robust M&A pipeline and are evaluating attractive targets that support our strategy while maintaining our strong financial discipline. We also paused our store rebrand and reimage initiative in the first quarter, but we plan to resume this program during the second quarter, and we will take a measured and thoughtful approach to ensure we are protecting our financial position. Overall, we expect our focus on streamlining operations and operating costs and bolstering our working capital position to mitigate the impact of near-term headwinds and allow us to operate on a cash flow positive basis throughout this pandemic. Finally, in June we temporarily amended certain financial unrestricted covenants of our existing five-year revolving credit facility, which we believe will provide us with greater financial flexibility to operate our business. Moving on to slide nine. Our balance sheet and liquidity position remains strong and we have confidence that we are well-positioned to navigate the current environment. We generated approximately $73 million in operating cash flow during the first quarter of fiscal 2021. At the end of the first quarter, we had net bank debt of $179 million and a net debt to EBITDA ratio of 3.86. As of July 25, 2020, we had cash and cash equivalents of approximately $145 million and availability on a revolving credit facility of approximately $255 million. Turning to our financial assumptions for fiscal 2021, given the ongoing uncertainty surrounding COVID-19, it remains difficult to accurately forecast the impact of the pandemic on our future operations. Therefore, we are not providing fiscal 2021 guidance at this time. We have provided some financial assumptions to assist with your modeling, which we have updated for our first quarter performance. Regarding our capital expenditures, we are increasing our range to approximately $30 million to $50 million in fiscal 2021 to account for the number of stores we plan to rebrand during the year, depending on the environment. The low end of our CapEx range assumes the rebranding of approximately 60 stores, while the high end assumes the rebranding of approximately 120 stores. In addition, we will continue to leverage our diverse and global supply chain, and expect tire and oil costs to remain relatively stable to slightly lower year-over-year. As we have discussed, we completed our planned store portfolio optimization during the first quarter, and as a result, we expect the closure of these 42 stores will benefit our operating income by approximately $3.8 million in fiscal 2021. Moving on to our actions to reduce costs. As we acted quickly to align our costs with the lower demand, we recognized approximately $50 million of cost reductions in the first quarter, and for the remainder of the year, expect to realize $5 million to $10 million in additional cost benefits. We anticipate lower cost savings in the second quarter as we intend to shift some of our marketing spend to enhance our recruiting initiatives and quickly ramp up staffing in our stores to match improving demand levels. And with that, I will now turn the call back to Brett for some closing remarks.

Thanks, Brian. Overall, we are encouraged by our gradually improving performance throughout the first quarter and second quarter to date, and remain cautiously optimistic that demand will continue to improve as this crisis subsides. This is supported by our belief that consumers will drive more, particularly given heightened risk of flying and public transportation. Further, our industry has traditionally been resilient in the face of a recessionary environment, as consumers are more likely to visit an aftermarket retailer like Monro to repair the cars they currently own than purchase a new vehicle. While the environment remains very uncertain, I am proud of our organization in how we responded to these challenges. During the quarter, we made a number of changes to streamline our operations, which in combination with the traction we are seeing from our Monro.Forward initiatives position us well to navigate the COVID-19 pandemic and emerge stronger from this crisis. We have maintained our commitment to a strong financial position and remain extremely diligent when it comes to capital allocation. During the second quarter, we plan to resume our store rebrand and reimage initiative, which underscores the strength of our business, despite the volatility in the market. In conclusion, I’d like to thank everyone at Monro for their outstanding work to protect health and safety across all aspects of our business and drive continuity for our customers. These priorities further supported by the execution of our Monro.Forward strategy position us well to deliver long-term value for our shareholders through COVID-19 and beyond. With that, I will now turn the call over to the Operator for questions.

Thank you. Our first question comes from Brian Nagel with Oppenheimer. Please proceed with your questions.

Hi. Good morning, guys.

Good morning, Brian.

Good morning.

So my first question is about the improving performance we’ve seen in the business during fiscal Q1 and into the early part of fiscal Q2. However, I’d like to know what is still holding the business back. I recognize that the negative 12 comparison is not directly comparable to the auto parts retailers. Nonetheless, generally speaking, as the auto industry continues to recover post-COVID, we are observing numbers that suggest an improvement over a negative comparison. Therefore, what do you believe is currently hindering Monro and preventing the company from achieving an even stronger growth and recovery in its business?

One of the key metrics we closely monitor in our business since the beginning of the pandemic has been vehicle miles traveled, along with gasoline consumption. Our performance has shown a strong correlation with these metrics since the crisis began. Overall, our national business has aligned well with broader national metrics. However, I’m particularly encouraged by our regional performance, especially given Monro’s significant presence in the northeast and the Baltimore and Washington area, where we've actually outperformed vehicle miles traveled. That said, we have faced some labor shortages as we ramp up our labor models, and we plan to make targeted investments in our recruiting capabilities in Q2 to quickly increase our labor to meet demand. In our business model, every unit of labor is essential for supporting sales, as much of our in-store labor is sales-generating. Overall, we are optimistic about our regional performance but see potential for growth as we enhance our labor support to meet improving demand. Additionally, our shift in digital marketing spend has positively impacted our online appointment traffic and phone inquiries, allowing us to make more targeted marketing investments at the store level. This approach also helps us identify areas where demand may not be fully met due to labor issues, and in Q2, we will focus our efforts on recruiting to better align our labor model with strong demand that we may not be fully serving at the moment.

Thanks, Brett. That’s very helpful. Second question I have is unrelated to this, I don’t know if you talked about this in your prepared comment at all, but as hopefully the economy starts to pull out of at least the depths of the COVID crisis, any update on your acquisition activity?

Yeah. As we commented, given how well the team has navigated through, I think, the crisis from cash flow point of view and the state of our balance sheet, it’s given us confidence especially in light of the improving trends that we have seen in the business to restart a couple of major strategic initiatives in our company. One is the rebrand initiatives we talked about. We are going to kick off and do 60 to 120 stores this year, but we have also reengaged our business development team, and we have got a pretty robust pipeline of M&A targets, and our team is actively engaged right now in evaluating those targets. But like always with Monro, we are going to take a very disciplined approach in how we invest our capital on acquisitions, but we certainly are in the mode right now where we are evaluating adding to our portfolio.

Thank you very much. Best of luck.

Thanks, Brian.

Thank you.

Thank you. Our next question comes from the line of Jonathan Lamers of BMO Capital Markets. Please proceed with your questions.

Good morning.

Good morning.

Good morning.

Brian, on slide seven, the EPS bridge, what is the $0.45 in the other bucket?

The reduction is primarily due to the cost savings we outlined, totaling about $15 million achieved in the first quarter. We acted swiftly at the start of the quarter and particularly in March to align our cost structure with the declining demand we were observing in our business. Our efforts concentrated on three key areas: ensuring our workforce in stores was adjusted to match the lower demand, focusing our marketing efforts on measurable and responsive advertising while cutting back on other types, and reviewing non-store overhead costs, including our warehouses and support center, which we adjusted mainly by furloughing some employees. As the quarter progressed, we noted a rebound in demand, and in response, we restored resources to support the rising demand in various categories. Looking ahead, we anticipate an additional benefit of $5 million to $10 million for the fiscal year 2021, most of which will occur in the latter half of the year, as we aim to invest further in labor in selected markets where it's warranted. A significant question remains about the future beyond fiscal year 2021 and the permanence of these cost savings. While the situation is fluid and subject to change, we currently estimate that around $10 million to $15 million in structural cost savings will continue as we transition out of fiscal year 2021, primarily attributed to labor reductions, marketing adjustments, and cuts in non-store overhead. If we maintain the same sales levels as in fiscal year 2020, this would translate to about 150 to 250 basis points of structural operating margin improvement. Thus, the $0.45 reflects these described cost reductions.

Yeah. Maybe just if I can add a little color to that too as to make a longer answer longer. I might add that with these initiatives that we talked about weren’t because of COVID. They were all planned out prior to COVID as part of our Monro.Forward initiatives on all three vectors. And we just leveraged the good work that the team has done in making good progress on installing some technology that enabled us to accelerate, I think, the pace of those initiatives we were able to capitalize on throughout COVID. So, it’s the good work of the team and that gets translated the short-term benefit into a long-term structural benefit to our business going forward.

Okay. Great answer. Just to confirm one point that Brian said, at $5 million to $10 million incremental benefit, you are speaking of H2 fiscal year 2021 versus H2 fiscal year 2020. So that’s $5 million to $10 million year-over-year, is that right?

That is correct.

Okay. Thank you. Switching gears to the rebranded stores. Do you have an update on the performance of the rebranded stores versus the network this quarter?

Yeah. As we talked about, we saw outperformance in our rebranded stores versus the others. You might expect, Jon, that given the regional nature of those stores and where they land geographically, it’s tough to draw comparison. However, what we have seen is about 500 basis points of comp sale improvement versus the chain average coming out of our rebranded stores.

Okay. And just on the Amazon topical announcement, I am curious for the stores that had Amazon onboard for more than 12 months. Do you have a same-store growth in online orders for that for the quarter or some updated color on how significant the economics could be there?

Yeah. I mean that’s not something we are going to comment on at that level of specificity. But I would say, that we have taken a step back, Jonathan. We are pleased despite the challenges of COVID. We have completed the rollout with Amazon. We are really pleased with the relationship there now having installation services available at over 1,240 stores in our 32 states. But similar to that, we are also pleased with our relationships with the other third-party installers. What we have seen during COVID I can comment on is, although maybe not a step function change in the increase in tire installations from all of our online tire sellers, we have seen a pretty significant increase in our online appointments to get tires installed and service done at our stores. So we think that’s pretty consistent with our broader thesis around, tires are a pretty confusing category for consumers to shop; consumers still see value I think in talking to professionals and experts at store locations and make sure they got the right tire for their vehicle. So we think it supports a broader advantage for Monro and having 1,250 brick-and-mortar locations, but also all the way continued relationships to expand our omnichannel presence with online third-party resellers, as we also continue to pursue our efforts to build our own e-commerce capability as well.

Thanks. Just last question on the rebranded stores, I noticed that the tire category significantly outperformed the others this quarter. Does that reflect the expanded tire departments for the refreshed stores or what would you attribute that to?

Yeah. I think there’s three things as we look at our business. I think if you go back to our Q4 results, one of the things we talked about was a fairly soft January, February start to the year on tires. So I think we did see, part of the industry felt a little benefit from some pent-up demand from calendar Q1 that rolled into calendar Q2. So that’s one dynamic. However, we are really pleased with our team’s efforts on rolling out our category management pricing tool. We have that now operationalized covering just under half of our stores right now, and as you might expect, we have picked the highest volume, highest impact tire stores with that system being installed, and I think, clearly, that’s helped. The rebranding of our stores certainly has also been a self-help initiative. And the fourth variable we talked about was around the shift to digital marketing and the good work our marketing team has done on improving our SEO performance. As we talked about, we are now ranked in the top three on online search for our core categories in over half of our stores. So, those four things I think are coming together that’s creating outsized performance in a key category like tires.

Thank you for your comments.

Thanks, Jon.

Thank you.

Thank you. Our next question is coming from the line of Bret Jordan with Jefferies. Please proceed with your questions.

Hey. Good morning, guys.

Good morning. Bret.

Good morning, Bret.

Hi. I guess, as you think about the labor issues at the store level, do you have a feeling, I guess, in that that comp for July, how much might have been lost to the labor shortage? I mean, can you quantify, I guess, maybe through the digital phone system, the number of customer requests you get that you can’t fulfill, or I guess, sort of what’s the headwind in the market versus the headwind in your own labor capacity?

It's somewhat challenging to provide a specific number regarding our performance. We believe we could have performed better if we had the right labor, but the extent of that impact remains uncertain. Currently, we are closely monitoring metrics such as online appointments and phone traffic to our stores, and we're pleased with the marketing team's efforts to convert these into strong demand signals. This data assists us in targeting our investment to address labor issues. However, translating this into comparable sales estimates is more complex. I can mention that we are still operating with a reduced number of stores open on Sundays. Before COVID, we had around 840 stores open on Sundays during the first quarter, which we reduced to about 400, and now we're at 600 in July. We estimate this has created about a 2% headwind for comparable sales this quarter due to fewer stores being open. While we can quantify this headwind more easily, we view the labor situation as an untapped opportunity, prompting us to refocus some of our marketing investments toward recruiting to meet the strong consumer demand we’re observing.

Okay. Could you talk a little bit about the West Coast performance that obviously is sort of a new market that you talked about south outperforming the northeast, but how was the west in general?

Yeah. As you know, we are kind of lapping our initial acquisition into California. We are really, really pleased with the progress that we are seeing in our acquired stores, relatively speaking certainly on a year-on-year basis we saw that on our results. The integration of California has all but done. We have had a few permitting issues on signs out in California. But Las Vegas is performing extremely well for us relatively speaking. But we are just really encouraged by the strength of the platform that we have built now out in California that pivoting and talking about our M&A strategy, I think, gives us a lot of confidence now to look at the number of targets in our pipeline and give it really strong consideration.

Great. Thank you. And then Brian, I guess, could I get the housekeeping the monthly comps rate for April, June?

Yes. We were down 41 in April, 24 in May, 14 in June, and then, obviously, down 12 in July preliminary.

Thanks. Thank you. Thank you, guys.

Thanks, Bret.

Thank you. Our next question comes from the line of Rick Nelson with Stephens. Please proceed with your questions.

Thanks a lot. Good morning. I’d like to…

Good morning, Rick.

Good morning.

…follow-up on July sales trend, you were down 12%. If you could speak to any sequential changes as the month progressed, are those declines narrowing?

Yeah. Well, as we have talked about, we exited, I guess, June finished that down 14%. We saw obviously a moderating improvement from June to July. As we talked about, Rick, I think, it’s a tale of two cities. We saw the improvements accelerate in the northeast. That was counteracted in the middle part of July with maybe a slowdown of the pace of recovery that we saw in the south. Exiting July now rolling into what’s our fiscal August, we are encouraged by a continued gradual improvement that we are seeing in our business overall.

And perhaps the markets where we have seen these recent COVID outbreaks in southern states, are you seeing any changes in the customer behavior or sales trends there?

Yeah. I think it’s consistent with what we said. That’s where we are largely seeing a slowdown of, I would say, the improvement. We are still seeing improvement. But the pace of the improvement certainly has slowed as we have seen the outbreaks increase.

Okay. Got you. And kind of curious about the independents, how you think they are performing here during the COVID challenges and your appetite to step on the gas on the acquisition front. Are there more willing sellers, less willing sellers, any comments on valuation would be helpful?

Yeah. I think there’s a couple of things that play here. I think, certainly, our pipeline is robust, as we have talked about, certainly, I think, as robust as I have seen in my tenure here at Monro. As it relates to the health of the independents, I think certainly the government programs around Paycheck Protection. It certainly helped I think a lot of those operators bridge maybe the decline in demand that we have seen during this period of time. So I wouldn’t necessarily call out anything in particular there. But I think the mood and the sentiment I think is consistent with what it was pre-COVID. I think we have got a lot of independent owners that they lack second generation succession plans to their business and they certainly are interested in exploring options to access. So we just feel really good about the improvement in our business, the state of our balance sheet and the attractiveness of the opportunities in our pipeline that we see that gives us confidence to restart the rebranding initiative, as well as, obviously, conversations around acquiring companies going forward.

Yeah. And your expectation for miles driven, we have seen some challenges there. I know some businesses like Google are talking about opening out to July of 2021. Do you think there is a correlation between offices opening in miles driven or how do you think about shaping up?

Yeah. Look, I think, there’s still a lot to unfold there, of course, once we get through the core crisis or the core pandemic…

Okay.

Understanding the structural changes in consumer behavior, such as office work, commuting, and shopping habits, is still uncertain. However, there are positive factors like the shift from mass transit to cars, which could result in fewer air travel trips and a greater inclination towards driving vacations. These trends may offset any negatives. Additionally, in a potential recession, we believe our business is resilient as consumers tend to keep their cars longer and become more value-conscious. Monro is well-equipped with our supply chain, cost structure, and store concentration to benefit from these future trends if they develop fully.

Great. Makes a lot of sense. Thanks and good luck.

Thanks, Rick.

Thanks, Rick.

There are no further questions in the queue. I will now pass the call back over to management for any closing remarks.

Well, thank you for joining us today and for your continued interest and support at Monro. We wish you a safe and healthy rest of your week. Thank you.

This does conclude today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.