Conference Transcript - MNRO 2026-09-15

Peter Keith, Analyst — Piper Sandler

All right, great. We'll get started. Thanks, everyone. My name is Peter Keith, the Senior Research Analyst at Piper Sandler, covering consumer hard lines and broad lines. Very pleased to have Monroe with us today, making a repeat performance. I think this is now third year in a row. So, Monroe, really appreciate you supporting our conference. On stage with me is CFO Brian D'Ambrosia, and in the front row is VP of Investor Relations, Felix. So, thanks, you guys, for coming.

Brian D’Ambrosia, CFO

Thanks for having me.

Peter Keith, Analyst — Piper Sandler

Yep, we thought we'd kick it off on the turnaround update. So you guys were here last year. CEO Peter was here, gave a great overview of the four key elements that you guys are focusing on for the turnaround at Monroe. And just to recap this for the audience, it's optimizing the store base, improved marketing to address customer traffic, evening out the performance across the store base, and then improving merchandising. So those four turnaround areas of focus, could you give an update on how each of those are trending?

Brian D’Ambrosia, CFO

Yeah, absolutely. I'd love to. So just to rewind for one second, we had embarked on an evaluation of performance improvement levers back in April of 2025. And out of that came the four work streams that you had just mentioned, the first of which being the closure of underperforming stores. So we did close 145 underperforming stores. We did that by the end of May of 2025, so in really quick order. Got the inventory moved around, and those stores were dark in May of 2025. That was important because we wanted to get that work behind us to allow the team to really focus on the opportunities for growth that we that we identified in the other three work streams since the closure of those stores we've been working small team is working to monetize those locations and we've successfully received proceeds of about 28 million dollars to monetize a lot of those stores we currently have 37 stores left and those 37 stores are expected to be monetized over the next few quarters so So that being said, we moved on to the second work stream, which is related to marketing. What we believe and what the output of the analysis showed is that we under-invested in marketing post-COVID, and we also had some suboptimal results from our marketing. So as we embarked on the new journey related to our marketing investments, we identified two areas, which are obvious areas, to focus our investment. One is on customer acquisition. And with that, we identified our highest value customers. We looked at our current portfolio of customers, looked at who the highest value customers were, and really focused on targeting those lookalike customers in order to drive the best customer lifetime value. And we focused on digital marketing, such as pay-per-click and paid word search. And we've seen really good results around that. And that allowed us to scale in about 100 to 150 store increments through December of 2025. And we reached about 950 stores receiving that incremental marketing. Not all stores deserved that incremental marketing or needed that incremental marketing. So that was basically full run rate through December of 2025 during that time period we also looked at our CRM results and we made new investments in CRM campaigns first we basically focused those campaigns on the highest return of communications back to our customers think if you were in for a service and you did not we recommended another service and we didn't give you that service then we ultimately send you a note or postcard or an email however we want to be communicated with to bring you back into the store so we focused on our and tested out a lot of testing on their highest return campaigns against the highest service the highest return services in addition on the marketing side during that time period we increased and enhanced our leadership in in marketing we hired Tim Farrell who's our VP of marketing he's got tremendous multi-unit experience in a lot of it in the auto aftermarket, having spent time in Valvoline and Sun Auto. And with that, we've continued to refine our journey on marketing. Our current enhancements related to the customer acquisition spend is really taking that national approach now that we're rolled out and going back into the markets and back into the customer profiles and getting much more targeted to try to drive enhanced returns for our existing spend by focusing on markets that are responding the most to the marketing and de-emphasizing markets that maybe we need to go take a different path with in terms of driving traffic on the CRM side we're leaning heavily into AI and machine learning to optimize that customer retention targeting so really trying to hone in on that one-to-one message to the consumer about a past service that they didn't get that we believe they need now or based on mileage requirements of their vehicle hitting them with an offer where we believe they'd be in market for something like an oil change brakes or tires so that is the continued journey around marketing our third work stream is related to in-store execution and selling effectiveness in the stores and what we found as a result of the assessment that we performed was that we do really well when we have teams following the Monroe playbook but it's the when we when we have variation in performance and execution against that, it's when we have fall off and overall financial performance in those stores. So it was really about creating consistency across how we're executing. And the first piece of that, in the first piece of the customer journey, is related to how our stores interact with our guests before they even show up. And so we really created a standardized process and playbook for how our stores handle online appointments. We always had a standardized online appointment calendar and scheduling system it was implemented it was adhered to differently store by store in terms of priority given to the online appointment in terms of having inventory readily available when that appointment comes in in terms of having to reschedule the appointment how we interact with the guests we standardized all of that so our stores are now using the online appointment scheduler in a standardized way in addition for guests that want to call our store and not interact online we implemented a store-wide call center located overseas now this call center provides a consistent experience for any guest who's looking to make an appointment with us they still have the ability to reach the store if they've got specific questions or want to talk to the store manager or if the call center agent requires additional support from the store and handling any questions that the guests may have but that really standardized the front end we moved into the store we'll talk about CONFIDRIVE, I'm sure, but CONFIDRIVE, which is our digital courtesy inspection, has really become the backbone for the in-store process and execution, and that really takes the full 360 view of the customer's car and allows us to communicate effectively throughout the in-store process about those needs and sell them what they need and help prioritize what they can wait on. The other piece related to stores is how we're overseeing the stores. so when we closed 145 stores we were able to streamline our district managers we require less of them because we have less stores and with that we were really able to overall elevate the capabilities of our remaining store managers of our remaining district managers so we have a much more streamlined communication process with those remaining district managers and we feel that they're all at a higher level collectively than we were before the store closure streamlining in addition we gave them as additional administrative support a lot of things that fell on the district manager were compliance items things like inventory counts piece counts oil tank measuring safety inspections lift inspections all extremely extremely important things but also things that distracted the district manager from focusing on in it and from improving performance coaching and enhancing operations so we added administrative support through operational excellence specialists that go out in the field and basically perform those services independent of the district manager the results are still the responsibility of the district manager to effectuate so if we have a an inventory shrink issue here or safety issue here those are being identified by the operation specialist to the district manager for corrective action but the actual counting and inspecting is not no longer falls on the district manager frees up a lot of time for them to focus on operations and then in addition to that we have implemented what we call our DM toolkit district manager toolkit so it helps our district managers oversee the stores and really it's a connectivity between trailing metrics and leading KPIs we've had a really robust scorecard that will tell you everything you want about what the outputs are of a store what this does it really connects it to the leading indicators so if you are falling short and break sales, it takes it and it connects it all the way back to the digital courtesy inspection, the comfort drive inspection, and helps you identify the reasons why maybe your inspection process or how you're selling off of that inspection process is letting you down and therefore resulting in less break sales than the rest of your district or than we would expect. And so it allows the district managers to connect a lot of the dots and then most importantly connect the dots for the store manager about how behaviors can change results and we had that originally launched to 150 stores we now have it rolled out to 340 with the real focus right now on our underperforming stores so the low end of the bell curve and we're seeing and encouraged to see some profit improvement in those stores moving on to the last work stream is our merchandising effectiveness and so merchandising effectiveness work stream really when It was all about optimizing, but it really got a little bit hijacked by tariff mitigation response in the early days, which we think we've navigated pretty well, and ultimately the impacts of tariffs on our business have been less than what we had potentially had anticipated. As we moved through and we really then implemented our merchandising strategy, we brought in another leader in addition to Tim over on the marketing side. We brought Katie Chang in over on the merchandising team. she's our SVP of merchandising she's held category management roles at Lowe's and also ran category and some strategy over at American Tire Distributors so very well known in the industry very well respected what she's been able to do is take that tire assortment and take our take our merchandising strategy and really streamline it and we'll talk I'm sure a little bit about more about this later but streamline it around strategic relationships and at the same time bring new tools in to help in our pricing strategies as well and so we've leaned heavily into machine learning to now develop our pricing strategies so that we are looking at elasticity we're looking at competitive sets we're looking at looking at step ups we're looking at profitability screens all across to how to determine how we want to price our tires maximize the impact of either volume, of margin, of sales, or, you know, a balanced approach at all. And then, in addition, on the merchandising side, we have strengthened our parts availability and continue to work with parts suppliers to continue to maintain a robust parts. So that's really the update through today. We're encouraged by the progress we've made over the last 17 months as we've embarked on this journey. and I think that what we're seeing is continued traction and improvement in the underlying initiatives despite maybe being partially masked by some of the challenges in the overall backdrop.

Peter Keith, Analyst — Piper Sandler

Yep, okay. So I want to get to the challenges of the industry backdrop in a second, but maybe we'll just recap kind of everything you said. Those four key initiatives, let's just say the optimized store base, that's sort of done. The remaining three, when you have the marketing, store performance, and the merchandising, which one of those three do you think you're furthest along on? Which one do you think you have the most work to do?

Brian D’Ambrosia, CFO

Yeah, I think we're far along on all of them. I think in terms of the work that has to be done, I think we've seen improvements in the metrics we measure around them. I think there's a lot of benefit. And I'll quickly go through the three. So marketing, while we had launched it all by last December, right now that optimization of marketing spent at the local level, like I talked about, in between markets, there's huge value in that because we're going to get more and more return for the dollars that we spend, in addition to the CRM, machine learning, and AI. So while we've ramped the spend, we still optimize against the spend that we currently have. And over the next couple quarters, we're still going to be outspending the prior year and out investing in the prior year by about $5 million a quarter. So we haven't even lapped the full investment yet. On the merchandising side, we just launched our new tire assortment April 1st. So it's kind of been partially impacted by more exacerbated trade down because of some of the macro headwinds that the consumer is dealing with. But the screen that we have in place is allowing us to take overall market share, as we said on our last call, and take market share in tier one with these more strategic relationships. But on top of that, we've really focused on adding another offering in tier four, which is our lowest cost tier, because that's where a lot of consumers are trading down to. And we've enhanced profitability there. That hasn't been fully, you know, baked into our full year results yet because it just launched at the beginning of the fiscal year. And then finally, on the operation side, you know, that's a journey that we continue to be on. And it was a couple years of change management to move from our paper-based inspection to our digital inspection tool. But we're starting to really see the benefits of it and seeing full adoption by our technicians of inspection on every single vehicle. but we continue to help the teams to then best sell off of that and present to the guests, and so there's more upside there. So I would say they're all probably equally developed, but they all have equal upside moving forward as initiatives get further refined.

Peter Keith, Analyst — Piper Sandler

Okay.

Brian D’Ambrosia, CFO

All right. Great.

Peter Keith, Analyst — Piper Sandler

So then we'll take sort of a big-picture view on the industry. It's been a pretty dynamic year with the conflict in the Middle East. to get the corresponding rise in oil and gas prices. What's been the cost, do you think, or I guess what's been the impact on the industry from a cost perspective and then impact on your lower and middle-income consumer base?

Brian D’Ambrosia, CFO

Yeah, I would say it's been a challenging environment. We, as a company, were pretty encouraged in calendar 2025. We delivered four quarters of consecutive comp store sales growth, and FY26, which ended in March, was our first year of comp growth in a few years. So really, I think highlighting the benefit that our business was seeing as a result of the initiatives that we launched and were rolling out. I think that we were disappointed to see what we saw in the turn of the – in 2026, which was a slower January. Definitely seemed like things got sluggish after the first of the year. We saw a business that was challenged by severe weather and storms in February. And then in March, we expected a better bounce back than we actually saw from February, but we didn't really see it because I think the impact of tax refunds was a little more muted than we had expected and a lot expected as a result of one big, beautiful bill. So we feel that the fourth quarter was a little bit softer, And that led right into our first quarter calendar, our fourth quarter. And that led into, obviously, the spike in oil prices, which put another leg down on our low-end consumer sentiment. And for us, that really shows up in our tire category. For the industry, it definitely showed up in the tire category because that's the most economically sensitive category because it's got the highest ticket. You can do an oil change for $100 or less. tires you're putting four tires on your car you're north of 500 maybe a thousand dollars depending on the tires that you're purchasing so so that created a lot of pressure in the tire category tires is an important traffic driver for us and so it puts some pressure on car count now it did it does put pressure on other categories but we in our q1 end of june we grew uh services like batteries were up eight percent we had road shocks that were up and we had alignments up despite just down car count and flattish tire units and I think that shows the importance of the courtesy inspection the attachment those other services due to existing tickets but I think overall what the industry is contended with is it's a fragmented industry so it's hyper local hyper competitive and hyper local so while everyone wants to pass along to the consumer that price that they're taking in terms of cost they have to be careful from a volume standpoint it's always a consideration and on top of that when the price is passed along the consumer has shown no shyness about trading down so pushing down to lower margin tiers and so that can create a problem when you try to price so overall what we're hearing in the industry is car count is challenged. Mix is pressuring price. A little bit of pressuring price mix. There's maybe a little price being passed through, but that whole dynamic is pressuring overall margins. And I'd say that's kind of the state of the industry, particularly if you have any meaningful exposure to tires.

Peter Keith, Analyst — Piper Sandler

And so, as you just happened to mention margins, you are expecting the gross margin in this current fiscal year to be consistent with last fiscal year. But you were just laying out some of those headwinds, particularly around mix. So just walk us through maybe what are the headwinds besides mix, and then what are the corresponding offsets to keep the gross margin flat?

Brian D’Ambrosia, CFO

Yes, so we did say consistent gross margins in FY27 versus FY26. We have three main components in gross margin. We have material costs, obviously, which we just talked a lot about. We've got labor costs. So our technicians, the guys turning the wrenches, they are in our cost of goods sold. And then we have occupancy costs, which are largely fixed. These are things like rent and building maintenance. So on a positive comp, which we believe we can deliver in FY27, we would expect to gain leverage on that last category, those fixed costs. That's the primary driver of increased gross profit. We also expect to see a tailwind from labor. We have seen some of our labor costs moderate, but we've also seen labor as a percentage of sales come down as we've gained productivity from the Comfort Drive purchasing inspection and the attachment of other higher margin services. So that's allowing us to bring our technician pay down as a percentage of sales. We're staff for growth. We're not doing it through cutting labor, but we're just getting more productive with the labor we have. Offsetting that is the headwinds that we talked about with materials. That gets you to kind of that net flat.

Peter Keith, Analyst — Piper Sandler

Okay. All right. The comfort drive is something you brought up a couple of times. Maybe you could also just explain to the audience what it is. It drives attachment selling. And obviously it's going to be a tool that your technicians are using. sometimes hard to teach new tricks to technicians. So how has that gone with incorporating it into the service garages?

Brian D’Ambrosia, CFO

Well, I think largely the good news is that the change management is behind us. So what it is is we used to have a paper-based form that the technician would go around with a pencil and their greasy fingerprints on the form and pencil in things like brake measurements, tire depth, thread measurements, conditions of air filters, conditions of other friction parts, oil levels, oil condition. And so we've moved that from a paper-based form a couple years ago to a tablet-based inspection. So they're out there with tablets and filling all of that out, much more efficient, and it will make sure that we're doing the 32-point courtesy inspection up to map guidelines. And basically the output is a red, yellow, green for the guests to really understand what they need. It also allows you to attach things like alignment results or battery test results so that they can see the actual printout of their – or actual result of their other testing that may be beneficial for them to understand. That presents a nice, easy electronic record to share with the guest, either if they drop their car off through e-mail or through text or to walk through with the guest in store. And it really facilitates the selling effort and also the prioritization effort. That then builds the estimate. And when declined on the estimate, if the guest says, I don't want to do that today, I know my brakes are yellow, but I'd rather hold off, it will then decline, and then we will be able to market to them after through our courtesy inspection or through our customer relationship marketing, hey, come back in for that break job. Here's an offer to bring you. So the most important thing, though, is now we can manage it. Because before when it was paper-based, it was unstructured data. Now we have structured data that now feeds that district manager toolkit I talked about to be able to connect the dots of, well, why are your breaks down? We'll hear your courtesy inspection results on brakes. You're not inspecting brakes every time or you're finding too many greens meaning Relative to what industry says the number of cars on the road are you have you're passing way too many So let's look at how you're measuring brakes or You're finding red brakes or yellow brakes, but your percentage that you're selling of them. I'll let's work on your selling So it allows you to now to build out that those KPIs or how many batteries did you find it needed to be replaced? how many batteries did you sell? Well, we have a disconnect here. Let's walk through and role play how you're selling batteries. So it becomes the way that now all of our leaders can now manage the business and see the data of what needs to be worked on without having this be standing next to every district manager to understand.

Peter Keith, Analyst — Piper Sandler

Okay, great. So maybe I'll just wrap it up with a final question on capital allocation. And you guys have a healthy dividend right now, But what are your general capital allocation priorities as we sit here today?

Brian D’Ambrosia, CFO

Yeah, our intent is to continue to fund our historical capital allocation priorities. And those include, you know, obviously we talked on them from an operating expense standpoint about the step-up in marketing spend. So that is one of our operating expenses that we want to make sure we fund. From a capital CapEx standpoint, we fund about $25 to $35 million of CapEx, which really is a lot of replacement CapEx, but also our growth in technology investments. We have about $40 million of principal payments on finance leases that are a capital allocation priority and then our dividend. I would say as it relates to those capital allocation priorities and specifically as it relates to the dividend, we review it every quarter to make sure that levels in payment.

Peter Keith, Analyst — Piper Sandler

Okay, great. All right. Thank you very much, Brian. We're out of time. We'll wrap it up there.

Brian D’Ambrosia, CFO

Yeah, I appreciate it. Thank you.

Peter Keith, Analyst — Piper Sandler

Appreciate it. Thank you.