Monro, Inc. (MNRO) Q3 2021 Earnings Call Transcript

Thank you. Hello, everyone, and thank you for joining us on this morning's call. Before we get started, I would like to remind participants that during the course of this conference call management may make statements about Monro's future performance that contain forward-looking information. 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 could 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 statements, 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 in our earnings release. Rob Mellor, Monro's Board Chairman and Interim Chief Executive Officer; and Brian D'Ambrosia, Chief Financial Officer are joining us today. For the question-and-answer portion of the call, our Chief Operating Officer, Rob Rajkowski will also be available to take questions. With that, I would like to turn the call over to Rob Mellor. Rob?

Thank you, Maureen, and good morning, everyone, and thank you for joining us today. This morning, I will talk about our third quarter results and the positive outlook for our business. We had a tough third quarter, which you can see in our results. While there are a number of reasons for this, including general market conditions, the principal reason was our earlier success in downsizing our stores' staffing levels to align our operations with the impact that the COVID-19 pandemic had on our revenues. Our prompt and decisive management actions allowed us to stay ahead of the curve. At the outset of the pandemic, we focused our efforts on right-sizing technician staffing levels at each store to meet lower demand. When demand picked up, we had to recruit hundreds of technicians. In fact, we have recruited over 700 technicians since July, but ramping up this number of new teammates presented a challenge. Getting our new teammates on board, introducing them to our operating standards, and getting them to full run rate in each store could not be done in a day or even a week. Each new recruit takes time before they can become fully productive, and some just don't work out. This was reflected in our October and November labor productivity levels and directly impacted our top line. Stores were not able to meet all the demand and sales opportunities were missed. During the third quarter, we accomplished the onboarding task and have reversed this trend. December was the best month of the quarter, with earnings only a few cents below our pre-COVID-19 December results of last year. Our new technicians are making significant contributions to sales, margins, and earnings. January is looking even better, with positive comparable store sales ahead of last year's pre-COVID-19 levels. We are encouraged by these positive trends, and we are well-positioned to drive higher same-store sales and profitability going forward. Importantly, we remain financially strong and well-positioned to execute against all of our growth initiatives. We look forward to fiscal 2022 with confidence. Our organization is stronger, battle-hardened, and proud of coming through an unprecedented year. Our initiatives are working, as Brian will discuss further in a moment, and we look forward with confidence in our business. And with that, I'll turn the call over to Brian who will provide additional detail on all our financial performance and recent acquisition. Brian?

Thank you, Rob, and good morning, everybody. Our performance in the third quarter, particularly in October and November, was challenged by general market conditions and lower labor productivity. The initiative that Rob just discussed, along with improved market conditions, drove comparable store sales trends in December, which posted the best monthly comp store sales since the beginning of the COVID-19 pandemic. This has continued into January with a comparable store sales increase of 3% supported by key sales improvements in our service categories. Looking at the third quarter results, an important takeaway relates to gross margin. Gross margin decreased 400 basis points to 33.8% in the third quarter. Variable gross margin was positively impacted by a 5% increase year-over-year in gross profit per tire driven by the completed rollout of our tire category management and pricing tool. This improvement was more than offset by a higher sales mix of tires compared to service categories. As expected, service items can be deferred for a short time during periods of economic slowdown. Additionally, variable margins were negatively impacted by higher technician labor costs as a percentage of sales, particularly in the first two months of the quarter. This was largely due to the addition of approximately 700 new teammates from July through October. As Rob discussed earlier, these new teammates required training to reach full productivity. We are pleased that our training initiatives combined with the completed rollout of our data-driven store staffing model have driven increased labor productivity as we move through the quarter. Consequently, technician labor costs as a percentage of sales declined steadily in December, as well as January. As a reminder, also included in our cost of sales are distribution and occupancy costs which are largely fixed in nature. We were able to reduce these fixed costs primarily through rent concessions, but lower comparable store sales outpaced these fixed cost reductions, resulting in lower gross margin year-over-year. We continue to execute disciplined cost control and saw benefits from our efforts to realign our marketing spend towards higher ROI digital channels, and right-size store management staffing. The year-over-year increase in operating expenses also reflects lower expenses from 29 fewer stores. Lower comparable store sales outpaced these fixed cost reductions and drove a slight increase in operating expenses as a percentage of sales. Importantly, while we experienced a decline in operating margin this quarter, we expect to generate increased operating margin against this lower fixed cost structure as sales improve. Net interest expense for the third quarter decreased to $6.8 million. This was driven by a decrease in our weighted average interest rate from lower borrowing rates on new leases, partially offset by an increase of weighted average finance lease debt in connection with our fiscal 2020 acquisitions and lease renegotiations. Our effective tax rate was 25.2% for the third quarter, compared to 24.1% for the same period last year. Net income for the third quarter was $6.7 million, and diluted earnings per share was $0.20. Adjusted diluted earnings per share for the third quarter, a non-GAAP measure, was $0.22, compared to adjusted diluted earnings per share for the third quarter of fiscal 2020 of $0.60. We continue to have ample flexibility to support our operations and execute our growth strategy. We generated $159 million in operating cash flow during the first nine months of fiscal 2021, representing an increase of 26% compared to $126 million for the same period last year. We invested approximately $39 million in capital expenditures, primarily related to our ongoing store rebrand and reimage initiatives and investments in technology, and paid approximately $18 million for acquisitions. We distributed $22 million in dividends to our shareholders and paid approximately $24 million in principal for financing leases. We were able to reduce our bank debt net of cash by approximately $56 million during the first nine months of fiscal 2021. We are well-positioned to continue to generate strong cash flow from operations in the fourth quarter and beyond. We substantially completed the rebranding or reimaging of 104 stores during the third quarter. Today we have completed the transformation of approximately 360 stores in a number of key markets, including rebranding 115 service stores to tire branded stores, and continue to see outperformance of our rebranded and reimage stores compared to our chain average. We now expect a capital expenditure range of approximately $45 million to $50 million, assuming the transformation of approximately 150 stores in fiscal 2021. At the end of the third quarter, we had net bank debt of $165 million and a net bank debt to EBITDA ratio of 1.3x. As of January 23, 2021, we had cash and cash equivalents of approximately $25 million and availability on a revolving credit facility of approximately $376 million. The impact of the COVID-19 pandemic continues to make it difficult to forecast accurately the impact of the pandemic on our future operations. Consequently, we are not providing fiscal 2021 guidance. We realized approximately $10 million in additional cost savings during the third quarter on top of the $20 million achieved in the first half of the year. These cost savings resulted from the optimization of store management staffing, the improvement of our marketing efficiency, and general overhead cost reductions. During the fourth quarter, we expect to achieve approximately $5 million in additional cost savings. As a reminder, our previously announced store closures are expected to benefit our operating income by approximately $3.8 million in fiscal 2021. Looking beyond fiscal 2021, we continue to expect approximately $15 million to $20 million in annual structural cost savings, in addition to approximately $5 million in annual benefits from store closures. I would now like to provide an update on our acquisition strategy. We completed the previously announced acquisition of 17 stores in Southern California in the third quarter, expanding our growing presence in the West Coast region. These locations are expected to add approximately $20 million in annualized sales. We are particularly excited about the growth prospects for Monro in this attractive and dynamic region. Despite the impact of the COVID-19 related lockdowns, this year we have achieved strong earnings contribution from our previously acquired California, Nevada, and Idaho stores. Our acquisition pipeline remains robust with over 10 NDAs currently signed for opportunities ranging from 5 to 40 stores. Strategically located acquisitions at attractive valuations remain a pillar of our growth strategy, and we are well-positioned to take advantage of the many opportunities for consolidation in our industry. And with that, I will turn the call back to Rob Mellor for some closing remarks.

Thanks, Brian. We are encouraged that our initiatives are taking hold, as evidenced by our strengthening performance late in the third quarter and January. Importantly, our strong cash flow and solid balance sheet provide us with the financial flexibility to support our business operations and make strategic acquisitions without substantially increasing our leverage. We have always conservatively managed our balance sheet and remain fully committed to doing so. This has allowed us maximum flexibility to execute on our growth strategy for the benefit of our shareholders. We are confident that this will continue to create long-term sustainable value. Before opening up the call for questions, I would like to provide an update regarding our search for a permanent CEO. We continue to make progress and are currently evaluating a number of individuals we believe have the skills and experience necessary to drive our transformation forward and build upon the momentum that our Monro.Forward strategy has created. We look forward to providing you with a more definitive update as soon as we are able. During this period of transition, I am proud of our senior leadership team for their exceptional commitment to driving our organization forward. I would also like to recognize the tremendous contributions of Maureen Mulholland, who was recently promoted to Executive Vice President and Chief Legal Officer. Maureen has served as General Counsel since 2003 and continues to partner closely with Brian and Rob in support of the ongoing execution of our Monro.Forward strategy and to ensure continuity across our business operations. I'd like to also highlight recent steps we've taken to further our corporate social responsibility efforts. Our execution of Monro.Forward actually incorporates building our long-term strategy in a responsible and sustainable manner. We view our responsibility to our teammates, customers, the communities in which we operate, and doing our part to take care of the environment as key components of long-term success. As part of our commitment to being a good neighbor in the communities where we operate, I'm pleased to announce that, through the support of our customers and teammates, we raised over $160,000 for Feeding America during the third quarter. With strong support from our Board of Directors, we are in the midst of increasing the formalization of our corporate responsibility efforts and are committed to expanding transparency in the coming months. Finally, I would like to extend a sincere thank you to our teammates for their incredible contributions to our company and for their ongoing commitment to safety, serving our customers, and driving operational excellence despite the challenges in the environment. And with that, I'll now turn the call over to the operator for your questions.

Our first question is from Jonathan Lamers with BMO Capital Markets. Please proceed.

Good morning.

Good morning.

Good morning, Jonathan.

Brian, you mentioned the reimage stores are outperforming the overall comp. Do you have any color on how much they're outperforming and the plans for reimaging for next year?

Absolutely, Jonathan. The outperformance is consistent with what we've described for the last couple of quarters, which is about 5 points better, 500 bps better in terms of comp outperformance. Related to the reimaging plans, we've done about 140 stores so far for the year. We're about to do 10 in Q4, and that's largely due to the fact that we got a lot done in Q3 ahead of winter weather. Much of our reimaging occurs in the Northeast, and as it's outside work that can only be done as the weather gets better. So we'll go out West, finish up some stores out there that we need to reimage from recently acquired stores, and then come back in Q1, and be back on pace with what we announced as our pace going forward, which is about 80 stores a quarter as the execution rollout pace. So we're on track, and we feel good about our ability to quickly ramp back up on this initiative post taking that pause in Q1.

Okay. So on the January comp improvement, I mean, in October, the message was comps are kind of performing in line with vehicle miles traveled. Now you've had this big improvement in your labor capacity and productivity. Vehicle miles traveled continue to be pretty soft. I think they were down 11% or 12% for January, last I looked. How would you characterize that 3% comp relative to the decline in macro trends we continue to see and how sustainable would you consider that delta to be?

Sure. If you examine our performance in January, we saw an improvement as we moved from November to December and then from December to January, where we saw an increase of 3%. It's essential to view this from two perspectives: our tire business and our service business. In the tire sector, we've consistently matched or exceeded the performance of the U.S. retail tire industry in both Q2 and Q3. The broader market faced softer conditions in October and November, but those conditions improved in December and January, and we outperformed that trend slightly. For our service business, the primary challenge was the onboarding of our new employees. This business heavily relies on technicians who conduct in-store vehicle inspections, determine necessary work, and present that information to store managers for sales. It takes time to fully train our technicians, which has affected our service sales. The positive news is that we have largely completed this onboarding and training as we progressed through the quarter, leading to improvements in December and even more significant improvements in January within our key service categories. This underlying enhancement in service has been crucial for achieving the 3% consolidated comparable store sales increase in January.

Okay, thanks. Just to circle up on that, could you give us the breakout of the monthly comps for Q3, please?

Absolutely. We were down 12% in October, 18% in November, 6% in December, and then as we set up 3% in January.

Okay, thanks. And on this discussion about potential new duties on tires from Southeast Asia, I know there's some uncertainty there on the exact policy timing and measures to be implemented. But if these were implemented, how would you think of this affecting your sales and gross profits over the year? I would think intuitively, this could shift mix to higher tier tires.

I appreciate the question. Amid ongoing macro concerns, including the global tariffs and other material cost pressures, we'll continue to leverage our vertically integrated and diversified supply chain which drives our costs leadership position and helps us remain a key differentiator in our industry. We have contingency plans in place regarding the potential tariffs in the region. We expect our network of multiple supply points to mitigate the exposure. Lastly, any tire cost increases not mitigated by our differentiated supply chain are expected to be passed on to the consumers.

Okay. Fair enough. I'll pass the line. Thank you.

Thanks, Jonathan.

Our next question is from Brian Nagel with Oppenheimer & Co. Please proceed.

Hi, good morning. Thanks.

Good morning, Brian.

Good morning, Brian.

So I have one, I guess, shorter financial question, then a bigger picture question. In terms of the shorter financial question, Brian, you talked a lot about the puts and takes on the gross margin line, clearly weak here in the fiscal third quarter. Recognizing you're not providing guidance, how should we think about just the trajectory of gross margins going forward? Or how some of those puts and takes might change? And then the second bigger picture question I have, again, recognizing there's a lot going on here with regard to the COVID disruptions, and even the management changes at admin roles. Where are we? Stepping back, where are we in the whole Monro.Forward initiative or turnaround repositioning effort? Thanks.

Thank you, Brian. Regarding gross margins, it's an important topic that we highlighted in our prepared remarks due to its impact on the quarter. To understand the quarter's performance, it's useful to identify the main drivers and provide some insights on how improved sales trends may influence our results in Q4 and beyond. First, the decline in comparable store sales by 13% this quarter has put a strain on our fixed costs, which affect gross margin, specifically distribution and occupancy costs. Any improvement in these sales, particularly increases in comparable store sales, will help us regain some leverage on those fixed costs. The sales trends we are witnessing in January, if they persist, could lead to a significant improvement in our gross margin profile, shifting from a significant challenge to a benefit as we harness fixed costs leverage with higher comparable store sales. This is what we anticipate as we continue to enhance top line performance. Additionally, the shift in the sales mix from tires to service categories was a factor in our Q3 results. However, with improved performance in our service categories this January, we believe there is room for further enhancement as the quarter progresses, which should alleviate the tire mix headwind. It's encouraging that we are seeing solid variable margin improvements within our tire category due to the implementation of our category management and pricing tool. Although the mix has not favored us, we have observed positive outcomes from our investments in this area. Concerning technician labor, we have already observed a positive trend reversal since December into January, with labor costs as a percentage of sales declining compared to October and November. Overall, the outlook for gross margin appears more favorable than in Q3, driven by an improving top line, better service mix, and labor productivity issues now behind us. We anticipate gross margins returning to levels we have historically seen. Regarding the Monro.Forward initiative, we've recently completed two significant technology upgrades for labor and tire management. While we are experiencing operational benefits from these initiatives, there is still much room for continuous improvement. We expect to maintain momentum from these efforts and yield returns on our investments. We are still in the early phase of our store reimaging project, having reimaged about 115 of our service stores into tire-branded stores, with about 400 stores remaining that could be rebranded, which would potentially lead to substantial increases in comparable store sales. In terms of Monro.Forward, though we are progressing in the overall positioning work we’ve undertaken, we are just at the beginning stages of witnessing the benefits of those efforts in our results. This underpins our confidence, as Rob mentioned, looking ahead into Q4 and beyond, knowing that the returns on our significant investments are not yet fully reflected in our results, and we are confident that they will materialize.

That's great. Very helpful. Thank you.

Yes, thanks, Brian.

Our next question is from Bret Jordan with Jefferies. Please proceed.

Hey, good morning, guys.

Hi, Bret.

Good morning, Bret.

Could you give us some color on regional performance, the Western stores versus South and Northeast? And I guess since you get the benefit of, through some of your NDAs, some competitive information, could you talk about where you see either better or worse market share comparisons?

Yes. Sure, Bret. I appreciate the question. If we look at the West, first of all, the West isn't included in our comps, but they're performing consistent with our expectations, posting strong earnings. In October and November, the Northeast and Midwest had a dip due to tire seasonality but had an uptick in December and January as the seasonality reversed. In the South, really performs similarly in all service categories with the exception of tires, with the latter not experiencing the same seasonality. So, all the markets across the portfolio performed similarly on the service categories, with the only difference being in the tire categories due to seasonality.

On a consolidated basis, if you roll up all the category dynamics, our Southern region outperformed the Northeast and Midwest by about 5 points in the quarter. That gap was wider, as Rob mentioned, because of the tire dynamics in the first part of the quarter in October and November, and it narrowed to be more consistent among all the regions in December and January, as business in the Northeast and Midwest picked up with the supporting tire general market conditions. As it relates to NDAs or other information that we have, we talked a little bit about the tire industry and our kind of meeting or exceeding the performance of the U.S. tire retail industry, and that information is really an accumulation of smaller and mid-tier chains across the country. We cross-section that to our regions to see how we're performing. So we feel, on the tire side, like we said, we are consistent. As it relates to service, we had some Monro-specific challenges related to labor, which probably put us at a little bit of a disadvantage early in the quarter. With those issues clearly in our rearview mirror, we feel good that we're performing on the service side of the business also at or near where peers are, especially as we have moved into January.

Okay, great. And then one question, I think you mentioned a couple of times some rent or lease concessions in the quarter. Is that an expense that is going to come back? Would you owe or did you negotiate if you will pay any of these concessions back as results improve? Or is this a sort of permanent cost reduction?

No, I think the ones that I'm talking about related that make their way into our P&L are primarily related to renegotiations of our lease. We've extended some terms, and in exchange for those extended terms, we were able to get lower renewal rates and a decrease in the rent in the current term. So overall, we still expect that we'll have lower rent expense structurally throughout the period of the renegotiation.

Okay, great. And then one final question, I guess, and not to get too granular on the cadence of comps, but could you talk about January, given the fact we're almost through the month, the plus 3%, has it continued to improve as the month has gone on? Or have you seen variability within that plus 3%?

Without getting into a weekly blow-by-blow ...

We could do daily.

We have seen continued strength from November, December and December into January. That January number is our full fiscal January, which closed on January 23 this past Saturday. So through this past Saturday, we put a plus 3% in the books. Obviously, our first comp increase since the COVID-19 pandemic began, so we're extremely encouraged with that performance and gives us confidence that we did the right things to manage the business through the pandemic, and we're doing the right things now to manage the business as demand has returned.

Right. Thank you.

Thanks, Bret.

Our next question is from Rick Nelson with Stephens, Inc. Please proceed.

Thanks. Good morning.

Hi, Rick.

Good morning, Rick.

So as you talked about technician productivity improvements, I’m curious are we back to normalized efficiency levels, or is that still something that we need to push forward with? What I guess when do you think we will be at normalized level if we are not there today?

Thank you for the question, Rick. We are happy with the current trends and productivity improvements, but we maintain a mindset focused on continuous improvement and will keep striving to enhance our performance. With over 700 new technicians trained, we’ve seen growth in all categories related to our margin performance and productivity, and we are optimistic about this continuing as we progress.

Is there a same-store sales level that you need to achieve to leverage operating expenses, that's January plus 3%? Are you in fact leveraging operating expense?

Absolutely. If you look at our quarter, Rick, we were down 13% in comparable store sales, and our SG&A as a percentage of sales went from 28.2% to 28.3%. That was driven by a $12 million reduction in our operating expenses. We've positioned the cost structure of the business to have significant leverage on top line, even probably at a breakeven or slightly down comp. So a plus 3% in January will drive leverage against our new lower fixed cost structure. I did talk about the cost reductions being $10 million in Q3 and only $5 million in Q4. That really reflects that in Q3, in reaction to the lower comps, we did a really good job of managing our costs to the lower top line, as we expected with January plus 3%, a higher Q4 performance. I've put back $5 million of that cost reduction, which we believe will be needed to support that top line. But still, $5 million lower than last year puts us at a pretty low leverage point from a fixed cost standpoint.

Okay. And finally, on the M&A front, you talked about the pipeline, the NDAs. Is this a situation where you're focused on the core business right now to get that improved and taking a break on acquisitions? If you could speak to pricing and acquisitions to multiples? Thanks.

Absolutely. Acquisitions are a strategic and key component of our growth strategy, and they continue to be. We have a robust pipeline of acquisitions that we feel are very actionable and very much aligned with our core wheelhouse and competencies to be able to execute them in an accretive and beneficial way for our business. So, I do not think that we need to make the either-or choice. I think that's evidenced by the fact that we closed on the Allen Tire deal in early December. Despite having executed on that transaction, we still are seeing the improved trends in December and into January. That deal does not look like it had any negative impact on our ability to continue to improve our business and manage it day to day. We've got adequate resources to act on our acquisitions and operate our business and improve our business. Our intention is to continue to do that. We think that's the most meaningful driver for creating long-term shareholder value. As it relates to multiples, we don't comment on those for competitive reasons, obviously. But we are seeing consistent multiples and consistent expectations from sellers with what we've seen historically. There's nothing I see that is causing any of that to change in the near term.

Great. Thanks a lot, and good luck.

Thanks, Rick.

Thanks, Rick.

Our next question is from David Bellinger with Wolfe Research. Please proceed.

Hey. Thanks for taking the question here. You made it clear that labor had meaningful impacts in October and November. Now that you're fully ramped up staffing, is there any way to quantify the level of sales you missed out on in the quarter? Could comparable sales track, call it, down mid to high single digits, excluding any of these labor impacts?

Yes, I think that as we talked about earlier, you really need to look at it through two lenses of the tire dynamic, driven by general market conditions, and the service dynamic driven by labor dynamics. As we look at exiting Q3 and into Q4, we have more typical general market conditions, particularly in the Northeast, that are more comparable to the prior year, whereas earlier in the quarter they were weaker than the prior year. We have labor dynamics in our stores that are as good or even better than the prior year in terms of supporting growth in our service categories. Quantifying the specifics of where the headwinds were throughout the quarter, it's probably not as useful as saying our positioning in both of those areas in January are on much better footing. If general macroeconomic conditions hold, that we would expect that our trend in January is much more indicative of where we expect the rest of the quarter to trend versus the trends we saw in the early part of Q3.

Okay. Got you. And just my follow-up, did you see any significant change in average ticket trends, especially as you move through the quarter after any normal seasonality within the tire category? Are you seeing consumers more willing to spend and perhaps engage in full repairs or higher-end brands now?

Yes. Our results throughout the pandemic, and certainly in Q3, were led by ticket versus traffic. That's pretty typical right now where we've seen higher tickets and a little bit more pressure on traffic given the nature of miles driven and the current global situation. That's helped by a mix toward tires. But we're also seeing good ticket out of our service category as well. But that ticket and service got better as the quarter went on, and results reflect the investments in training that we did on the labor side.

Thank you.

Thank you.

Our next question is from Stephanie Benjamin with Truist. Please Proceed.

Hi, good morning. Thank you for the question.

Thank you. Good morning.

Hi, Stephanie.

Not to kind of beat a dead horse here, but I'm a little curious as we look at the monthly performance in the quarter, and the pretty meaningful drop-off that you saw in November. I'm just trying to get a sense; when we last spoke at the end of October, you indicated that October numbers were pretty much tracking in line with vehicle miles driven. I'm trying to get an understanding of when we saw that pretty steep decline in November, what was going on? Can you provide a little bit of color on what the tire category did in November? I'm just trying to get a sense of, obviously, this is a tumultuous time, and with COVID being front and center in November and sort of improving forward. I'm just trying to sit as I think through as you did see nice improvement in December and January; how much of that was due to maybe a pullback in November? Or are we out of the woods yet? Any category dynamics you can provide, or what you think caused such a decline in that November month would be helpful?

Yes, absolutely. A great question. In November, down 18 was really driven by the tire category, primarily in the Northeast and Midwest. Even though we were down significantly in that tire category, we were at or above the U.S. retail industry performance. So it was an industry phenomenon, driven by soft market conditions and mild weather in the Northeast and Midwest compared to the prior year in November. We were disappointed by the weakness that we saw but encouraged by the fact that we drove consistent and outsized performance in our tire category, while also continuing, as we discussed in the prepared remarks, to expand our gross profit per tire, which ended up being up 5% in the quarter even though demand was softer earlier on, particularly in November.

Got it? Thank you. And last question for me. I think across the board, we're hearing that there are a lot of supply chain constraints and just the inability to get needed automotive parts. The headlines have been very strong, and semiconductors are another part. Has there been any issue from a tire standpoint procurement and just being able to have the inventory to meet any potential reacceleration demand?

Stephanie, thank you for your question. With our diverse supply chain, we have not experienced any negative impacts. We have been able to obtain products and source them from our various vendors. We also have contingency plans in place in case the situation changes. However, within our network of multiple supply sources to reduce our risk, we have not felt any effects thus far.

Great. Thank you so much.

Thanks.

Our next question is from Scott Stember with C.L. King & Associates. Please proceed.

Good morning, guys, and thanks for taking my questions.

Good morning, Scott.

Hi, Scott.

Just looking at the recovery that we've seen in December and into January, it seems like, based on your comments, a lot of that has to do with tires. Is it fair to assume that everything across the board, all the other segments are up as well in the month of January, or is this more of a tire dynamic that we're seeing?

Yes, Scott, as we talked about earlier, there are really two lenses to it. Tires are certainly benefiting as we move from November to December and into January with a firming of the general market conditions in the tire category. We've maintained and outperformed that market in the U.S. industry retail units. As it relates to the service side, it's really improving because of the better productivity of the technicians that we've onboarded in the quarter. Both those dynamics are contributing to the improvement we've seen over the last three months and into January. It's fair to say that we've seen improvements in all of our service categories and also in tires. I'm not saying that every single category is comp positive, but every single category is contributing to the improved trend we're seeing.

Yes, excluding tires, when considering the service aspect of the business, there seems to be greater cyclicality or dependence on the underlying markets. Can you discuss your confidence that despite a challenging job market and many of your customers facing significant pressures, there won't be a decrease in demand in the upcoming months? Are you quite confident that the positive observations at the store level with your technicians, along with their improved utilization, will enable you to maintain progress?

Yes. In relation to that, Scott, what we've achieved this quarter is aligning our capacity much more closely with demand. Earlier in the quarter, there was a gap between our ability to meet demand and the actual demand itself. However, as we entered January, we've increased our capacity to match demand levels. We will be more impacted if demand fluctuates. Nonetheless, we are optimistic about the trends in vehicle miles traveled and the ongoing vaccination efforts. While I can't predict consumer behavior or vehicle miles traveled, I can say there is an overall upward trend that is positive for our business. This gives us confidence moving forward, and we remain hopeful for a strong tire business in the industry as we close out the fourth quarter.

Got it. For my last question, I'd like to address the broader issue that comes up every few quarters regarding how weather impacts your business, both positively and negatively. What is your current perspective on the seasonality of your operations? Specifically, tires tend to experience a decline in business during months without significant weather, like we saw in October and November, but then can rebound a couple of months later. Are there any strategies you are currently implementing or considering to mitigate this volatility?

I think we can't move our stores, unfortunately. We do have exposure to the Northeast and the Midwest, which are affected by seasonal changes. We see that in the trends of the U.S. retail industry, and being part of that industry, our trends are correlated to that. But we do have initiatives underway to continue to stimulate tire demand, and regardless of the macro backdrop, we want to outperform and take our share in the industry. With the fragmentation of the industry, we feel we have an opportunity to take share and not rely just on the industry going up or down as seasonality changes. We also think it's important as we acquire stores to continue to acquire in geographies that we have been concentrated in, which has been in the Southeast and the West Coast. That helps to diversify our business away from Northeast tire demand. We are doing what we can in that area, but in the short term, we're still going to be influenced by weather dynamics.

Got it. That's all I have. Thank you.

Thanks, Scott.

Thanks, Scott.

This does conclude our question-and-answer session. I would like to turn the call back over to management for closing remarks.

Well, I just want to say that thank you for joining us today and for your continued interest and support of Monro. We look forward to providing you with an update on our progress next quarter. We all hope you have a safe and great day. Bye, bye.

Thank you. This does conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.