Monro Inc Stock

Good morning, ladies and gentlemen, and welcome to Monro, Inc.'s Earnings Conference Call for the Second Quarter of Fiscal 2027. [Operator Instructions] As a reminder, this conference call is being recorded and may not be reproduced in whole or part without permission from the company. I would now like to introduce Felix Veksler, Vice President of Investor Relations at Monro. Please go ahead.

Hello, everyone, and thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we will be referencing a presentation that is available on the Investors section of our website at corporate.monro.com/investors.

If I could draw your attention to the safe harbor statement on Slide 2, I'd like to remind participants that our presentation includes some forward-looking statements about Monro's future performance. Actual results may differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Monro's filings with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, on today's call, management's statements include a discussion of certain non-GAAP financial measures, which are intended to supplement and not be substitutes for comparable GAAP measures. Reconciliations of such supplemental information to the comparable GAAP measures are included as part of today's presentation and in our earnings release.

With that, I'd like to turn the call over to Monro's President and Chief Executive Officer, Peter Fitzsimmons.

Thank you, Felix, and thanks to everyone for joining us. Great to be with you today. I want to start by saying that while our fiscal second quarter presented some real headwinds, I remain genuinely encouraged by the progress our team continues to make in executing against our performance improvement plan. The environment we're operating in is not without its challenges. Consumer spending pressures, category softness and a dynamic macroeconomic backdrop have all created friction. But what I hope comes through clearly this morning is that the work we are doing at Monro is deliberate, it is gaining traction, and it is positioning us well for the road ahead.

This morning, I'd like to update you on our progress and the momentum we've continued to build despite a challenging fiscal second quarter. Since we completed our store closure program over a year ago, my comments today will focus on the 3 remaining key performance improvement initiatives you're already familiar with, which are: driving profitable customer acquisition and activation; improving our store-based customer experience and selling effectiveness; and increasing merchandising productivity, including mitigating the impacts of trade and supply disruptions. After that, I'll briefly touch upon our fiscal second quarter results as we continue to implement our performance improvement plan to enhance Monro's operations, drive profitability and increase total shareholder returns.

Let's start with driving customer acquisition and activation on Slide 3. Many of you have heard us talk about marketing optimization over the last several quarters. And I'm pleased to report that this work continues to yield tangible results even in a difficult demand environment. During the second quarter, we continued to refine our digital marketing and leverage the strength of our CRM platform through targeted promotional investments designed to address specific opportunities in both our brakes and oil categories.

Importantly, the increased precision of our marketing execution also resulted in a year-over-year reduction in our cost per lead during the quarter. That combination, better outcomes at a lower cost is exactly the kind of marketing efficiency we've been working to build. On the oil side, specifically, we have been testing 2 promotional approaches. One combines transparent everyday pricing with additional promotional offers, while the other emphasizes compelling percentage and dollar off discounts without displaying the underlying price. We believe that these promotional offerings helped us to support the improvement in store traffic we saw in September relative to July and August. We've also seen a significant increase in the average repair order for oil change visits scheduled through both our customer call center and our online appointment system, which speaks to the quality of the customer engagement these channels are generating.

When you factor in service attachments, the average ticket size of these transactions grows to roughly 2 to 3x the dollar value of an oil change by itself. That's a compelling illustration of how a well-executed traffic-driving strategy can translate into broader revenue opportunity. And beyond the transaction level data, we're also seeing improvement in customer call volume in certain pockets of the country, another encouraging sign that our marketing programs are resonating. We will continue to direct our marketing spend into the areas with the highest potential return on investment, and we remain confident that this disciplined, data-driven approach will continue to strengthen our customer acquisition and activation efforts going forward.

Now let's discuss the things we are doing to improve the customer experience and selling effectiveness in our stores. You have also heard us talk about the rollout of our enhanced district manager toolkit over the last several quarters, and I want to take a moment to share some of the meaningful progress we've made in this area. I believe it represents one of the most important structural improvements that we are making to how we operate at the store level. As a reminder, this is a metrics-driven toolkit specifically designed to help us identify and address suboptimal operating performance with the goal of improving store profitability at the local level.

I would add that data alone doesn't drive results. The difference comes from using it to coach and train effectively at every level, from store managers and assistant store managers to skilled technicians. We previously indicated that we have rolled this out to approximately 340 store locations, and we are encouraged by the early results we've seen in a subset of those stores, where we've already observed a meaningful improvement in just the past several months. As an example, 146 of the stores that have received DM toolkit and coaching support achieved mid-single-digit growth in sales with a bottom line improvement of more than 20% year-over-year in the second quarter. This early traction gives us real confidence in the toolkit's ability to drive change at scale.

During the second quarter, we took an important step to further accelerate that progress by establishing a dedicated operating efficiency team. This team was created specifically to leverage and scale the toolkit capabilities more broadly and more rapidly across our network. As part of this effort, 3 of our most talented and experienced field leaders has stepped into coaching and training roles, working directly with store teams in the areas of the country where the opportunity for improvement is greatest. Their presence in the field is already making a difference, and we expect their impact to compound as their work takes hold. I'm pleased to report that we have now rolled the district manager toolkit out to a majority of our store locations. This is a significant milestone. With many stores now operating with access to this tool, we have a consistent data-informed foundation from which to drive continued profitability improvements across the entire chain, and we intend to build on that foundation with urgency and focus in the quarters ahead.

Now let's turn to merchandising, including mitigating the impacts of trade and supply disruptions. After successfully completing an update in our tire assortment, our merchandising team has shifted their focus to working closely with our parts suppliers to ensure that our stores are stocking the right products at the best price to meet the needs of our customers. More specifically, we currently have an initiative underway aimed at improving the overall quality of our brake assortment in many of our store locations. Continuing to work as a strong partner with our existing core vendors, while at the same time, identifying new vendors that can help us meet customer needs is key to helping us drive improved sales as well as better margins.

On the category performance front, I'm pleased to report that we saw year-over-year comparable store sales growth in both batteries and maintenance services during the second quarter. While sales comps in our brake category were down in the quarter, we leaned in with targeted promotional activity that enabled us to drive unit growth in this high-margin service category, which we view as an important indicator of underlying demand that we can continue to build on as our assortment improvements take hold. Our ConfiDrive inspection tool continues to play a meaningful role here as well, helping our store teams better educate customers on their vehicle needs and creating natural opportunities to connect customers with the services that matter most to their safety and their vehicles' performance. And for the second consecutive quarter, the combination of improvements to our in-store stocking programs and our front-of-shop presentation drove 8% growth in our battery comps. This kind of consistent, repeatable performance in a specific category is a direct reflection of disciplined execution at the store level, and it gives us a useful model to apply more broadly.

As it relates to product access, our supply has been largely uninterrupted by the extended geopolitical tensions in the Middle East, at least so far. While the availability of oil has impacted some players in our industry, we have continued to receive the supply necessary to meet the needs of our customers. With that said, the cost for oil have definitely risen in the current environment. We continue to partner with our vendors to understand and manage costs in what continues to be a dynamic environment. We expect to continue to strike the right balance between potential pricing adjustments to protect gross margins while also remaining competitive and delivering value to our customers.

Now let me briefly touch on our fiscal second quarter results, which Brian will cover in more specific detail in just a few moments. Turning to Slide 4 of our presentation materials. Our second quarter comparable store sales declined 1.8%. This reflects an operating environment, which continued to challenge the full service auto aftermarket during the quarter. Our comp store sales decline was driven by lower store traffic, consumers that continue to defer higher ticket spending decisions and traded down to lower cost alternatives in tires and our use of self-funded promotions to drive unit growth in our brake category. The effectiveness of our ConfiDrive courtesy inspection process continued to demonstrate its value in a meaningful way. ConfiDrive helped us drive average repair order growth during the quarter, and it was a key contributor to the comparable store sales gains we saw in batteries and maintenance services.

These results reinforce that Monro's full-service model is a genuine competitive advantage and that when we execute it well, customers respond. The ability to identify a customer's vehicle needs in real time, communicate them clearly and address them with quality and care is what distinguishes a full-service provider, and our results in these categories reflect that. As it relates to the use of the district manager toolkit and the improved coaching and training it enables, the infrastructure we have put in place to drive consistent, data-informed performance at the store level is real, and we expect its impact to become increasingly visible in our results as the work matures.

Finally, we have maintained our marketing investment during the quarter, even as sales fell short of where we wanted them to be. This was a conscious strategic choice. We believe that pulling back on marketing in a challenging demand environment would be shortsighted and that the customer acquisition and activation momentum we are building is too important to our long-term growth objectives to sacrifice for near-term cost relief. The improvement in store traffic we saw in September and the growth in average repair order for appointments booked through our online and call center channels all validate that our marketing investments are working, and we intend to keep building on that foundation.

Finally, our preliminary October comp store sales are flat, which demonstrates the resiliency of our business in a challenging environment. The initiatives we have described this morning, our marketing optimization, our store-level operational improvements and our merchandising work are designed to strengthen our competitive position through cycles like this one. We are not standing still. We are building and we are building with purpose. And we remain confident that the foundation we are laying today will translate into improved performance as conditions normalize.

This morning, we also announced the completion of a refinancing of our business, and I want to take a moment to speak to what that means for Monro and for our shareholders. We are genuinely pleased to have secured the support of a financing partner who understands and believes in this business, in the strength of our model and in what our talented team has the ability to accomplish over the next 4 years. In an environment like this one, having a committed long-term financing partner is not something we take for granted, and we are grateful for the confidence they have placed in us. That said, I want to be equally clear about what this refinancing does not represent. It does not mark the conclusion of our strategic alternatives review process. Our Board remains fully engaged in that work and continues to collaborate diligently with its independent financial and legal advisers to consider and evaluate a full range of potential opportunities. That includes, but is not limited to, asset sales, strategic acquisitions and operational improvements or a sale of the company.

Every option remains on the table, and the Board is approaching this process with the seriousness and rigor that our shareholders deserve. What I can tell you is that while this important work continues in the background, our management team remains squarely focused on what we can control, delivering service excellence to our customers every day and executing against the performance improvement initiatives you've heard about this morning. I would also reiterate that there is no deadline or definitive time line established for the completion of the strategic review, and there can be no assurance that the process will result in any particular transaction or other strategic outcome. Given that, we do not intend to make further public comments on the process unless and until we determine that additional disclosure is appropriate or required.

Before I hand the call over to Brian, I'd like to use this as an opportunity to once again thank all of our teammates for their commitment to meeting the service needs of our customers in the communities where we operate and for their continued dedication to achieving our business objectives. Keeping consumers' vehicles safe across our network of more than 1,100 stores in 32 states is a job that requires skill and dedication all day, every day. We are grateful to have more than 6,200 talented teammates in our shops and at our store support center.

And with that, I'll turn it over to Brian, who will provide an overview of Monro's second quarter performance, financial position and additional color regarding the remainder of fiscal 2027. Brian?

Thank you, Peter, and good morning, everyone. Turning to Slide 5. Sales decreased 1.8% to $283.6 million in the second quarter, which was entirely driven by a 1.8% decline in comparable store sales from continuing store locations. For reference, comp sales were down 1% in July, down 3% in August, and we exited the quarter flat in September. While our tire category sales were down 4%, we were able to hold our tire unit volume flat in the quarter. Gross margin decreased 50 basis points compared to the prior year. This primarily resulted from higher occupancy costs as a percentage of sales, which were partially offset by lower material costs as a percentage of sales.

Total operating expenses were $97.4 million or 34.3% of sales as compared to $90.4 million or 31.3% of sales in the prior year period. The increase was primarily driven by a $6.1 million increase in store closing costs, net of gains and losses on sales of closed stores, $3.4 million of higher costs at continuing locations, primarily front shop labor, $3.2 million of higher marketing costs to support our top line, $1.7 million of higher litigation reserve costs and $0.3 million of higher costs related to shareholder matters. These were partially offset by $7.1 million of lower costs incurred in connection with consultants related to our operational improvement plan, $0.4 million of lower transition costs related to our back-office optimization and $0.2 million of lower costs from the closure of 145 underperforming stores in the first quarter of fiscal 2026.

Operating income for the second quarter was $2.6 million or 0.9% of sales. This is compared to operating income of $12.8 million or 4.4% of sales in the prior year period. Adjusted operating income, a non-GAAP measure, for the second quarter was $4.4 million or 1.6% of sales as compared to adjusted operating income of $14 million or 4.8% of sales in the prior year period. Net interest expense increased to $4.7 million as compared to $4.4 million in the same period last year. This is principally due to higher weighted average debt.

Income tax benefit was $0.3 million or an effective tax rate of 17%, which is compared to an income tax expense of $2.8 million or an effective tax rate of 32.9% in the prior year period. The year-over-year difference in effective tax rate is primarily due to the impact of discrete tax expense related to share-based awards and other adjustments, none of which are individually significant. Net loss was $1.6 million as compared to net income of $5.7 million in the same period last year. Diluted loss per share was $0.05. This is compared to diluted earnings per share of $0.18 for the same period last year. Adjusted diluted loss per share, a non-GAAP measure, was $0.01. This is compared to adjusted diluted earnings per share of $0.21 in the second quarter of fiscal 2026. Please refer to our reconciliation of adjusted operating income, adjusted net loss and income and adjusted diluted loss and earnings per share in this morning's earnings press release and on Slides 9, 10 and 11 in the appendix to our earnings presentation for further details regarding excluded items in the second quarter of both fiscal years.

Turning to Slide 6. We generated $4 million of cash from operations during the first half of fiscal 2027. We invested $13 million in capital expenditures, paid $19 million in principal payments for financing leases and distributed $18 million in dividends. As it relates to our closed store real estate dispositions, we have continued our process to exit the real estate at these locations. During the second quarter, we successfully exited a total of 9 leases and sold 3 owned locations, which resulted in proceeds of $3 million. This brings us to a total of 15 leases exited and 7 locations sold, resulting in cumulative proceeds of $6 million fiscal year-to-date. This leaves us with a remaining balance of 25 stores that have the potential to be monetized during the next several quarters.

As Peter mentioned, on October 23, we entered into a new 4-year credit agreement with Ares Capital Corporation. providing for $375 million in senior secured credit facilities, consisting of a $250 million term loan facility and a $125 million revolving credit facility, both maturing on October 23, 2030, with fees commensurate with a private lending facility. The new credit facilities are secured by substantially all of the assets of Monro and its subsidiaries. The new credit facilities replace our prior credit facility that had been in place since April 2019, which was repaid upon the closing of the new credit facilities. The term loan and revolving loan facilities bear interest at floating rates. The credit agreement for the new credit facilities includes customary affirmative and negative covenants, including financial maintenance covenants, certain prepayment requirements and restrictions on the amount of dividend payments, subject to compliance with certain financial metric requirements.

In connection with the closing, we substantially paid down our obligations under our supply chain financing program and will no longer accept new supplier obligations into that program after December 31, 2026. As of October 24, 2026, we had approximately $27 million of cash and equivalents and $60 million available under the new credit facilities.

Now turning to our expectations for the full year of fiscal 2027 on Slide 7. While we will continue to drive our performance improvement initiatives, we now expect to deliver year-over-year comparable store sales that are flat to slightly down in fiscal 2027, given continued macro pressures on the consumer. As a reminder, the results of our store optimization plan reduced total sales by $9 million in the first quarter of fiscal 2027. Gross margin for the full year of fiscal 2027 will largely depend on where comparable store sales land, but we would expect to be consistent to down slightly versus fiscal 2026. We expect higher selling, general and administrative expenses as we invest in additional marketing to support our top line. We expect that net interest expense will be between $28 million to $32 million due to higher interest and fees associated with the new credit facilities and higher debt levels under the new credit facilities related to the substantial paydown of obligations under our supply chain finance program. Regarding our capital expenditures, we expect to spend $25 million to $35 million.

And with that, I will now turn the call back over to Peter for some closing remarks.

Thanks, Brian. As we've indicated on earlier earnings calls, we remain confident that through our national retail network, economies of scale and durable business model, we can provide our customers with the services they need and generate meaningful value for our shareholders. We also believe that the steady improvements our marketing, store performance and merchandising initiatives are driving will make Monro the preferred national full-service provider in the automotive aftermarket.

With that, I will now turn it over to the operator for questions, but we would ask that you keep today's questions focused on the financial results we shared today.

[Operator Instructions] Your first question comes from the line of Thomas Wendler with Stephens.

I wanted to kick things off maybe just with the increase in oil pricing you guys were seeing. Can you give us an idea of how much of that 3% growth in service was driven by the increased oil prices?

I can't give you an exact number there. I can tell you that the increased cost has led us to increase price to our customers where appropriate and giving consideration to being competitive in different markets across the country and also that we have been aggressive in the quarter that just ended and continuing with our promotions, which will affect revenue because what we're really trying to do with oil is drive incremental traffic, not just transfer the cost of oil -- the increased cost of oil to our customer. And as we mentioned on the call, as it relates to oil and what it can do for us, in addition to the actual oil business, we get attachments that are 2 to 3x what the oil price is. So we're willing to be a bit more flexible about what oil pricing is in order to get attachments and long-term customer growth.

That's great color. And then maybe just sticking with the customer growth discussion. You guys had flat units on tires this quarter, but there's been a lot of discussion on people trading down from sets of 4 to sets of 2 or even one tire. Are you guys seeing more customers, tire customers right now, but maybe less tires per customer? Or have those headwinds kind of abated a bit?

I think we're seeing in the second quarter about the same number of customers. It's just that the ticket and the tier of tire has changed with the number of tires, as you suggested, in slight decline, not huge, but slight and enough to affect revenue and the trade down has continued. Having said that, in September and October, we saw some improvement in comp store sales, and we saw some improvement in the tires that are being purchased. So the pressure in the second quarter is very similar to what we experienced in the first quarter with some encouragement recently, September included, to a transition to a better mix of tires.

Your next question comes from the line of Brian Nagel with Oppenheimer.

So first question I want to ask, we've talked for a while now, but just the macro pressures out there and the impacts, those pressures you're having upon your business, particularly sales and recognizing you operate in a very fragmented space. But as you're looking at your business and the data you have and what other intelligence, are you losing or gaining -- is there gaining market share? I mean, do you see any type of market share shift there either broadly or kind of on a local market-market basis?

As you pointed out, as a full service aftermarket provider that sells both tires and services, we compete against a lot of different locations and stores running from discount tire to mainly parts to a local service. It's very hard to measure market share in all of the things that we offer. Where it's easier to measure market share would be in tires. And in tires, we continue to believe that in the second quarter, we held our own in the industry and that we performed pretty well at both the first tier and fourth tier. You've heard us talk a bit about [ barbelling ] that continued in the second quarter. So I think as it relates to tires specifically, we've held our own in the current market.

That's helpful. Then my follow-up question, the sales trajectory in the quarter, and then I guess, here into the fiscal -- the next fiscal quarter as well. I mean, so it improved, right? You got to flat. Do you -- is that -- do you think that -- is it easing macro pressures? Or is that more internal initiatives taking hold here?

I think it's our internal initiatives that has driven our performance in the last couple of months. As we've said, in order to drive long-term growth in traffic, you need to support your business with marketing, and we continued that. I absolutely know that, that's driving a better performance. I think that we saw some improvements in service. We continue to see improvements there. And I can tell you for sure that as we were last year, we are well stocked in tires for winter when winter comes. The one thing in this business that's hard to forecast is when it gets cold and when those tires move. So I think that our positioning in merchandise assortment and our support for all of that in marketing and finally, the things that we're able to do with our district manager toolkit to have the stores be prepared for serving the guest suggests that independent of what's going on in the macro environment, we can continue to improve our business.

Your next question comes from the line of David Lantz with Wells Fargo.

I was curious if you could just size the gross margin buckets in the quarter across D&O materials and technician labor. And in light of the updated expectations for '27, curious if you could just talk about your expectations for the second half glide path from here for gross margins?

Yes, absolutely. So when we look at the gross margins for the quarter, they were down 50 basis points to prior year. That was driven by 80 basis points of deleverage on occupancy costs partially offset by 30 basis points of material cost decreases as a percentage of sales. Technician labor was flat compared to the prior year quarter. As we look forward, we called our gross margin percentage to be flat to slightly down. That's in line with the change in the outlook for sales. So really, the only thing that's changed there is that deleverage on the occupancy cost in the current quarter. And then on a slightly overall lower sales number for the full year, we would see some incremental deleverage on occupancy costs. That's the only change from our outlook last quarter. We don't see any change in our variable margins as it relates to material costs or technician labor versus what we commented on in Q1.

Got it. That's helpful. And then considering you're down 1.8% comp this quarter, can you break out ticket and traffic and how that looks on a quarter-to-date basis as well?

Absolutely. Traffic was down mid-single digits and the ticket was up a few points, causing the delta to be down 1.8% on a net basis.

Your next question comes from the line of Bret Jordan with Jefferies.

Could we talk about the financing package, I guess, the new partnership? What is fees versus rates? What is the policy around dividend payment? And then I guess, some detail as far as how the supply chain financing program is being sort of unwound, I guess, what's the balance sheet impact?

Yes, absolutely. So I'll start out by saying that we have filed our 10-Q this morning. The 10-Q includes incremental disclosures versus what we commented on the call today and in the earnings release. It also includes the full credit agreement, so there's plenty of information about the specifics as it relates to covenants, affirmative, negative financial as well as requirements for dividends. What I will say is that our previous credit facility had a maturity date on November 10 and was set to go current in November 10 of this year -- it was maturing in November 10, 2027. We had always planned to refinance the credit facility in advance of that going current. And we had a number of financing alternatives with multiple lenders, and we chose the path that we announced today. So we believe the new 4-year credit facility provides stable financing and appropriate flexibility for us to execute our business plan with a sophisticated, tailored private lender that has experience in the auto aftermarket.

As it relates to the refinancing, we did pay down approximately $153 million of our obligations under our supply chain finance program. And as we said, we're not going to accept any new supplier obligations into this program after December 31 of this year. So substantially paid down the program, and there's a little bit of a tail still left to unwind. Because of the higher rates and the higher fees, we talked about the impact on debt interest costs in FY '27 being -- now we expect interest to be between $28 million and $32 million for fiscal '27. As it relates to dividends, I'll make some higher-level comments there. Again, the specifics are in the credit facility and more disclosed in the 10-Q. The new credit agreement gives us flexibility to pay our normal dividends in December this year, obviously, and as always, that the Board will consider that as they always do on a quarterly basis before deciding whether or whether to not pay a dividend in December. And then also the credit agreement allows us to pay normal quarterly dividend beyond December, subject to achieving certain financial metrics. Again, if we achieve those financial metrics, then the Board will evaluate debt on a quarterly basis.

Okay. Great. So as far as working capital goes, you're not going to be running any payables program on inventory anymore, so you're essentially going to be -- accounts payable to inventory will be something closer to 30% to 200%?

Yes. We'll have a much more traditional working capital position and current ratio as it relates to current assets and current liabilities.

Your next question comes from the line of John Healy with Northcoast Research.

I wanted to focus on Slide 9 a little bit, the adjustments to operating income. I see the consultants expense came down pretty substantially year-over-year. And I was wondering if you could kind of walk us through how that dynamic works in terms of thinking about that contribution tailwind, headwind in future periods? And then secondly, just on the special review, were there any sort of costs that were also kind of in that -- need to be adjusted out or that you could quantify for us that's been kind of ongoing in the P&L?

Maybe I can start with the question about consulting costs. As you know, AlixPartners was very helpful to us, particularly in the earlier days of our turnaround efforts. And as time has passed, I feel very confident that we have all the right resources at the company to drive improved performance. And we have used third-party consultants a little bit for strategic advice, but the objective was to have qualified third-party experts help us put together our action plan, which we've talked to again today. And I would say for the past 9 to 12 months, the management team has done an excellent job in executing against the things that we as a management team designed with a little bit of outside support.

And then just as it relates to the strategic alternatives review, any costs or incremental costs associated with that or with our third-party legal advisers or financial advisers will show up in the costs related to shareholder matters line on that schedule.

Great. And then just another clarification question. I think you guys talked about getting out of 15 leases, selling 7 locations with proceeds of about $6 million. I assume the proceeds are only from the 7 locations. There wouldn't be any sort of odd proceeds out of the lease exits. I just wanted to make sure the 7 locations sold paired right with the $6 million proceeds.

No. We do receive lease assignment fees to the extent that we may have an attractive lease with enough term on it that would be attractive to another party to step into that lease. And for the benefit of them taking that lease on at the terms with the landlord, we could receive lease assignment fees associated with that. That would be included inside that $6 million number.

We have reached the end of the Q&A session. I will now turn the call back to Monro's President and CEO, Peter Fitzsimmons, for closing remarks.

Thanks again, everyone, for joining us today. We're pleased with the progress Monro has made, and we're optimistic about the opportunities in front of us. I remain confident that the company is well positioned to capitalize on the operating improvements we've put in place, and I look forward to keeping you updated on our progress in the quarters to come. Have a great day.

This concludes today's call. Thank you for attending. You may now disconnect.

Good morning, ladies and gentlemen, and welcome to Monro, Inc. earnings conference call for the first quarter of fiscal 2027. [Operator Instructions] If anyone should require assistance during the call, please press *0 on your touch-tone phone. As a reminder, this conference call is being recorded and may not be reproduced in whole or in part without permission from the company. I would now like to introduce Felix Boroditzky, Vice President of Investor Relations at Monro. Please go ahead.

Thank you. Hello everyone, and thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we will be referencing a presentation that is available on the Investors section of our website at corporate.monro.com/investors. If I could draw your attention to the Safe Harbor statement on Slide 2. I'd like to remind participants that our presentation includes some forward-looking statements about Monro's future performance. Actual results may differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Monro's filings with the SEC and in our earnings release.

The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Additionally, on today's call, management statements include a discussion of certain non-GAAP financial measures, which are intended to supplement and not be substitutes for comparable GAAP measures. Reconciliations of such supplemental information to the comparable GAAP measures are included as part of today's presentation and in our earnings release. With that, I'd like to turn the call over to Monro's President and Chief Executive Officer, Mike Broderick.

Thank you, Felix, and thanks to everyone for joining us. Great to be with you today. This morning, I'd like to start by acknowledging that this was an undeniably difficult fiscal first quarter for Monro. The operating environment was challenging under the backdrop of extended geopolitical tensions in the Middle East, leading to higher oil prices, which impacted customer spending and traffic across our store network. We are not satisfied with these results, and delivering improved performance is our top priority. That said, I want to be clear about what we're seeing beneath the surface. While the macro pressures on the consumer are real and significant, the operational improvements we've been implementing are gaining traction.

We're building capabilities that are fundamentally changing how we serve customers, how we deploy our resources, and how we manage our business. These are structural improvements that position us to capture market share and drive profitability as conditions normalize. Since completing our store closure program over a year ago, we've been laser-focused on the three remaining performance improvement initiatives, which are driving profitable customer acquisition and activation, improving our store-based customer experience and selling effectiveness, and increasing merchandising productivity, including mitigating the impacts of trade and supply disruptions.

Each of these initiatives showed measurable progress during the quarter, even as the top-line environment remained under pressure. We're making the right investments, building the right capabilities, and positioning Monro to emerge stronger when consumer spending stabilizes. We believe that the work we're doing now is further solidifying the foundation for sustainable, profitable growth. In a moment, I'll walk you through the specific progress we've made in each of these three areas. Then, I'll provide some context on our first quarter results and what we're seeing in the current environment as we execute our performance improvement plan to enhance operations, drive profitability, and increase total shareholder returns.

Let's start with driving customer acquisition and activation on Slide 3. During the first quarter, we continued to strengthen our marketing capabilities by refining how we allocate media, customer outreach, and promotional investments across our store network. We are increasingly tailoring our approach to the needs of individual markets, allowing us to deploy our marketing investments more effectively while supporting both guest acquisition and customer retention. Within our CRM platform, we continue to enhance our AI and machine learning capabilities to help determine the most relevant timing, messaging, and promotional offers to our existing customers. These ongoing refinements have improved the efficiency of our customer outreach and contributed to stronger campaign response rates.

We also continue to evolve our promotional strategy through the expansion of specific marketing offers to the consumer to drive incremental traffic. In the first quarter was the enhanced use of our CRM to drive incremental traffic of existing customers through specific offers for high-volume services, including oil changes and tire replacements. With regards to our digital marketing investment, we also expanded the use of pay-per-click to drive traffic in districts and regions where our analysis indicated that potential customers had an in-market need for some of our products and services. We also worked in close collaboration with our tire vendors on the development of promotional programs to meet specific customer needs in all tire tiers, given the current environment.

Collectively, these efforts are helping us deliver more relevant value to our guests, while strengthening the data and capabilities that support more informed marketing decisions. They also provide greater insight into where and how our marketing investments can have the greatest impact. On previous earnings calls, many of you have heard us talk about optimizing our marketing spend. During the spring, we continued to refine our process and as a result have redirected advertising dollars to customer profiles in different regions of our store network to address both near and longer-term business needs. Our goals are to ensure that we get the most out of our marketing spend by giving certain types of customers motivation to visit us now, which we believe will allow us to add incremental sales.

Now let's discuss the things we are doing to improve the customer experience and selling effectiveness in our stores. Our ConfiDrive inspection tool remains the cornerstone of our customer experience transformation. With each quarter, our team becomes increasingly skilled at conducting the inspection more efficiently and in presenting the results of our findings so that our customers can better understand their vehicle needs. We also intensified our training efforts with technicians to guarantee both the completion and accuracy of these critical inspections. Our goal is to help our guests identify and prioritize what they need to do to keep their vehicles safe.

Our ConfiDrive process is designed to build trust with our customers through a quality diagnostic supported with pictures to truly show areas that require attention. Safety, trust, and confidence on the road is what we want to deliver for our customers. This transparency isn't just about building trust. It's about fundamentally changing how customers perceive automotive service. When customers can understand exactly what we're seeing through detailed visual documentation, it eliminates the skepticism that has historically plagued our industry.

Additionally, on our previous earnings call in May, we talked about the recent rollout of our enhanced district manager toolkit, which has enabled us to address suboptimal operating performance through a focus on gross margin opportunities at about 150 underperforming locations. Utilizing both the results as well as our learnings from the first 150 stores, we've now expanded the rollout of this toolkit to approximately 340 locations and broadened our scope from gross margins to overall store profit improvement opportunities. We continue to be encouraged by the profit improvement we've seen in some of these store locations. We expect this process to improve store profitability across the network as we roll this initiative out further.

Now let's turn to merchandising, including mitigating the impacts of trade and supply disruptions. After the reset of our tire assortment in the fourth quarter of fiscal 2026, with the support of our vendors, we delivered a more attractive assortment to the consumer in the current environment. We succeeded in two important ways. In the first quarter, we believe that our updated tire assortment in Tier 1 helped us gain market share versus the industry in this higher margin tier. This comes at a time when some consumers also migrated to lower tier tire products. In Tier 4, we believe that our decision to add an opening price point tire enabled us to provide our most price-conscious customers with a better set of options.

As it relates to Parts and Service, we saw year-over-year comparable store sales growth in batteries, alignments, and front-end shocks. While the use of our ConfiDrive inspection tool certainly helped us to better educate our customers on their vehicle needs, we believe the improvements we've implemented in both our in-store stocking programs as well as our front-of-shop presentation, enabled us to drive 8% growth in our battery comps in the quarter. And as it relates to trade, our supply has been largely uninterrupted by the extended geopolitical tensions in the Middle East, at least so far. We continue to partner with our vendors to understand and manage costs in what continues to be a dynamic environment. We expect to continue to strike the right balance between potential pricing adjustments to protect gross margins while also remaining competitive in delivering value to our customers.

Now let me briefly touch on our fiscal first quarter results, which Brian will cover in more specific detail in just a few moments. Turning to Slide 4 of our presentation materials, our first quarter comparable store sales declined 1.7%. This reflects an operating environment which continued to challenge the full-service auto aftermarket during the quarter. Our comp store sales decline was driven by lower store traffic, as well as consumers that continue to defer higher ticket spending decisions in tires and brakes, and traded down to lower cost alternatives in our tire category. However, and importantly, in an environment where traffic was down and consumers were cautious, we were able to hold our tire unit volumes flat, and we believe this allowed us to take market share both in our Tier 1 tires as well as in our overall tire category.

We believe that this is a direct result of our promotional effectiveness and the timely expansion of our Tier 4 tire offerings, which allowed us to meet the needs of our customers across the price spectrum. And while traffic and sales were under pressure, the effectiveness of our ConfiDrive courtesy inspection process helped us drive average repair order growth in this quarter. This was driven by meaningful improvements in certain of our higher margin service categories, including batteries, alignments, and front-end shocks. This performance reinforces that we continue to deliver genuine value to our full-service customers. We're not just a tire shop. We're a comprehensive vehicle service provider, and customers are responding to our value proposition, even in a difficult spending environment.

Importantly, we maintained our marketing investment during the quarter, despite the sales headwinds we faced. When traffic is down and sales are under pressure, there's an obvious temptation to pull back on marketing spend to protect margins in the short term. We deliberately chose not to do that. We continued investing in customer acquisition, in CRM campaigns, in promotional programs, and in building our marketing capabilities. Here's our reasoning. The capabilities we're building in marketing and customer acquisition are critical to our long-term growth trajectory. The market share opportunities in front of us require sustained investment and consistent presence in the market.

If we pull back when conditions are challenging, we risk losing momentum in customer acquisition, we risk ceding market share to competitors who maintain their investment, and we risk undermining the progress we've made in building a more sophisticated marketing engine. We're playing a longer game here, and that requires maintaining investment even when the immediate return is pressured by macro headwinds. And while our preliminary July comp store sales are down approximately 1%, as certain consumers continue to feel increased pocketbook pressure as a result of recent increases in gas prices, as well as other related costs, we believe that the operational progress we've made is building on the foundation for improved performance as consumer spending stabilizes.

We're not satisfied with where we are, but we remain confident in the direction we're heading and the capabilities we're building to get there. Before I hand the call over to Brian, I'd like to take a moment to once again thank all of our teammates for their commitment to meeting the service needs of our customers across 1,115 stores in 32 states and for their dedication to achieving our business objectives. And with that, I'll now turn it over to Brian, who will provide an overview of Monro's first quarter performance, financial position, and additional color regarding the remainder of fiscal 2027. Brian.

Thank you, Peter, and good morning, everyone. Turning to Slide 5, sales decreased 4.6% to $287.1 million in the first quarter. This was primarily driven by a reduction in sales of $9 million from the closure of 145 underperforming stores in the first quarter of fiscal 2026, as well as a 1.7% decrease in comparable store sales from continuing store locations. For reference, comp sales were up 1% in April, down 2% in May, and we exited the quarter down 3% in June. While our tire category sales were down 1%, we were able to hold our tire unit volume flat in the quarter.

Gross margin decreased 50 basis points compared to the prior year. This primarily resulted from higher occupancy costs as a percentage of sales, which were partially offset by lower technician labor costs as a percentage of sales. Total operating expenses were $96.7 million, or 33.7% of sales, as compared to $113 million, or 37.5% of sales, in the prior year period. The decrease was primarily driven by $17.8 million of lower store closing costs in the first quarter of fiscal 2027, $4.1 million of lower costs from the closure of 145 underperforming stores in the first quarter of fiscal 2026, and $3.7 million of lower costs incurred in connection with consultants related to our operational improvement plan. These were partially offset by $4.9 million of increased marketing costs to support our top line and $4.6 million of increased costs at continuing locations, primarily front shop labor.

Operating income for the first quarter was $3.7 million, or 1.3% of sales. This is compared to an operating loss of $6.1 million, or negative 2% of sales in the prior year period. Adjusted operating income, a non-GAAP measure, for the first quarter was $2.2 million, or 0.8% of sales, as compared to adjusted operating income of $14 million, or 4.7% of sales in the prior year period. Net interest expense decreased to $4.6 million, as compared to $4.8 million in the same period last year. This was principally due to lower weighted average debt, which was driven by a decrease in finance lease obligations related to our stores.

Income tax expense was $0.2 million, or an effective tax rate of negative 7.7%, which is compared to an income tax benefit of $2.7 million, or an effective tax rate of 24.8% in the prior year period. The year-over-year difference in effective tax rate is primarily related to a decrease in unrecognized tax benefits, as well as the impact from other adjustments, none of which are significant on the change in pre-tax loss. Net loss was $2.1 million as compared to a net loss of $8.1 million in the same period last year. Diluted loss per share was $0.08. This is compared to the diluted loss per share of $0.28 for the same period last year.

Adjusted diluted loss per share, a non-GAAP measure, was $0.09. This is compared to adjusted diluted earnings per share of $0.22 in the first quarter of fiscal 2026. Please refer to our reconciliation of adjusted operating income, adjusted net loss and income, and adjusted diluted loss and earnings per share in this morning's earnings press release and on Slides 9, 10, and 11 in the appendix to our earnings presentation for further details regarding excluded items in the first quarter of both fiscal years.

Turning to Slide 6, our AP-to-inventory ratio was 185% at the end of the first quarter versus 202% at the end of fiscal 2026. Our cash used for operating activities of $30 million was largely driven by timing of payments that caused accounts payable and accrued expenses to be a use of cash in the quarter. We invested $8 million in capital expenditures, spent $9 million in principal payments for financing leases, and distributed $9 million in dividends. As it relates to our closed store real estate dispositions, we have continued our process to exit the real estate at these locations. During the first quarter, we successfully exited a total of six leases and sold four owned locations, which resulted in cumulative proceeds of $3 million. This leaves us with a remaining balance of 37 stores that have the potential to be monetized during the next several quarters.

At the end of the first quarter, we had net bank debt of $99 million, availability under our credit facility of approximately $261 million, and cash and equivalents of approximately $10 million. Now, turning to our expectations for the full year of fiscal 2027 on Slide 7. We expect to deliver year-over-year comparable store sales growth in fiscal 2027, primarily driven by our performance improvement initiatives. The results of our store optimization plan reduced total sales by $9 million in the first quarter of fiscal 2027. Given continued cost inflation, we expect that our gross margin for the full year of fiscal 2027 will be consistent with fiscal 2026. We expect higher selling, general, and administrative expenses as we invest in additional marketing to support top-line growth. We expect to fund our capital allocation priorities during fiscal 2027. Regarding our capital expenditures, we expect to spend $25 million to $35 million, and with that, I will now turn the call back over to Peter for some closing remarks. Thanks, Brian.

Through our national retail network, economies of scale, and durable business model, we continue to believe that we can provide our customers with the services they need and generate meaningful value for our shareholders. We also remain confident that the marketing, store performance, and merchandising initiatives that we activated a year ago will make Monro the preferred national full-service provider in the automotive aftermarket. Before we turn to review of strategic alternatives that we announced last quarter. The Board is working diligently alongside its independent financial advisors, Bank of America and Solomon Partners, and its legal advisors to consider and evaluate a full range of potential opportunities, including but not limited to asset sales, refinancing of the business, strategic acquisitions and operational improvements, or sale of the company.

That work is well underway and as you have heard today, we remain focused on delivering service excellence to our customers while we explore all options to maximize shareholder value. I would reiterate that there is no deadline or definitive timeline set for the completion of this strategic review, and there can be no assurance that the review will result in any particular transaction or other strategic outcome. As such, we don't intend to make any further public comments on the process unless and until we determine that further disclosure is appropriate or necessary, and we would ask you to please keep today's questions focused on the financial results we shared today. With that, I will turn it over to the operator for questions.

[Operator Instructions] Our first question comes from Thomas Wendler from Stephens. Please go ahead.

Good morning everyone. Happy to see the stabilizing tire volume trend, especially kind of what I've been hearing with the industry, you know. You've highlighted the benefits from the change of assortment in Tier 1 and Tier 4. Could you maybe dig a little deeper into the marketing front, the benefits you've seen there, and what's kind of working for you right now on tire volume sales?

Hi Tom, it's Peter. Thank you for the question. I think that the continued combination of digital marketing, which is new customer acquisition oriented, and a use of that for tires, primarily with pay-per-click, which only results in a cost to us if a customer is in the market for tires, together with the assortment and the way we present it in the stores has really helped us with acquiring new customers for tires. As it relates to CRM, which is more focused on the existing customer base, we've worked on specific offers, not only in tires, but also in oil, to drive incremental traffic back to the stores from folks who have already visited us. So I think it's the combination of both digital and CRM that's helped us maximize the performance on tires at a time that the industry has not done particularly well.

Perfect, thanks for that. And then for my second question, could you maybe walk us through the drivers of the negative 1.2% comp in July? Are there any call-outs by product or service we should be thinking about?

No, I don't think that there's anything in particular. I think the consumer continues to feel pressured by high gas prices, by high food prices, by healthcare. We've talked about this before, but even though what we offer is a non-discretionary product and service, you gotta make a choice about how you're going to spend the dollars that are available to you. It's not true of all of our customers, but it's true of a significant number of them. And I think more than anything, it's that current environment condition that affected our comps in the month that just ended. I do think that all of the things we've talked about, and I want to reiterate it's a combination of marketing, improving our customer experience in the store, and our merchandising assortment, those things collectively are going to continue to make us the type of full-service automotive provider that we want to be and that I think our customers are attracted to.

Perfect. I appreciate all the color, guys.

Sure. Thanks, Tom.

Our next question comes from Brian Nagel from Oppenheimer. Please go ahead.

Good morning. So the question I want to ask, look, I mean, it's no secret that high gas prices have impacted spending broadly, particularly in your auto category. But I guess the way I want to ask the question, we've seen oil prices or gas prices bouncing around a lot over the last few months. So as you look at your business, again, I know this is short-term focus, but just to try to parse out whether, the extent to which these oil prices are impacting your business, versus maybe something else. When oil prices moderate, do you see an uptick? Do you see consumers return?

Absolutely. Where you see it affecting our business is in deferral of high ticket investment, mainly tires but also brakes. We didn't perform as well in brakes in the most recent quarter because that is a higher ticket. And it's the sort of thing that you can defer if you don't have to do it. So even though our inspection tool might suggest to a customer that that would be something they would want to give attention to, they don't have to do it immediately. And it's the pocketbook pressure that I think has affected that. With tires, what's happened is the customer has moved towards buying fewer tires per transaction. And even though we continue to do well in Tier 1, where the customer isn't as price sensitive, in Tier 2, 3, and 4, they're thinking a little bit harder about which tire are they going to buy. And so those two things collectively, I think, impacted where our sales ended up in the most recent months.

That's helpful, Peter. So I guess my follow-up question to that, you know, assuming, again, it's hard to say what's going to happen. Assuming that oil prices do stay elevated or frankly can climb from here, are there, as you look going forward, are there levers that you can pull? You know, and obviously you're already doing a lot to enhance the business, enhance those consumer touch points, but are there levers you can pull to sort of say, help offset that dynamic?

Yes, we can continue to optimize marketing. We can look where in our network we need to invest a little bit more in driving traffic into the stores. And so that's something that having been at this marketing approach for the last year, we have much better information that enables us to target marketing. And we've seen it help us. I'll give you an example. In South Florida, we invested in incremental pay-per-click and changed the offer price of certain oil products, and we saw a significant increase in units there. You don't see it everywhere, but we have the ability to direct our marketing investment to places that we feel will benefit from it the most.

Yes, one other question, if I could squeeze one more in, a different topic. So, you know, as a company, you continue to reiterate, I forget exactly which, but you maintain your capital priorities. How should we think as we're watching Monro and through this repositioning and given muted results, how should we think about, so to say the prioritization around funding or funding the dividend?

Yes, Brian, this is Brian. Thanks for the question. So we have, as we said, the intention and expectation to fund our historical capital allocation priorities, and that includes the dividend. But as historically been the practice and what will continue to be the practice is that's a quarterly review, a review done by management and the Board, taking into account everything, cash flows, current performance, projected performance, compliance with covenant requirements in the credit facility, and then we make a determination about the dividend in that quarter. That's how the process has been, that's how it will continue to be, and we'll take into account all those data points in making those decisions.

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

Yep. Thanks, Brian.

Our next question comes from David Lantz from Wells Fargo. Please go ahead.

Good morning. You know, within the 55 basis points of gross margin decline in the quarter, curious if you can talk about the buckets in a little more detail across, you know, [ D&O ] material costs and technician labor. And then as you guide for flat for the year, curious if you can talk about the glide path a little bit more detail from Q2 to Q4 as well.

Yes, absolutely. Thanks, David. So as it relates to the 50 basis point decline in the quarter, occupancy costs increased as a percentage of sales by about 90 basis points. That's really reflective of the leverage of those largely fixed costs on the lower comparable store sales levels. Offsetting that or partially offsetting that was technician labor costs that were lower by 40 basis points as a percentage of sales. And then with material costs flat year-over-year, that gets you to your 50 basis point decline in gross profit year-over-year. As it relates to the go-forward, I think it's really the improvement that we expect to see in comparable store sales to deliver the positive comps for the full year really underpin what we call our call on a consistent gross margin year-over-year. And that's because we expect with higher sales, we'll get better leverage and better fixed cost leverage on the occupancy costs and to a certain extent technician labor costs. And that'll be the difference between being short of prior year and being higher than prior year as we move into the back half of the year, allowing us to deliver the consistent full year gross margin number.

I would add one more thing. As it relates to tires, I really believe in our assortment and I think what we've seen is a move to Tier 4 tires industry-wide. When we see a shift back, and there's a little bit of evidence in the last month or two that there's been a shift back, we should get a boost in our tire margin. We worked very hard to manage our material costs. Our material costs are well in line with where we want it to be. And with incremental volumes of Tier 1, 2, and 3 tires, we're going to increase the gross margin rate.

Got it. That's helpful. And then on SG&A. So that step, you know, adjusted SG&A dollars stepped up, you know, a little over $5 million year-over-year. Curious if we can talk about, I know you're guiding for higher year-over-year for the full year. And Mark, you mentioned marketing investments will start to lap in the second half. But curious if we can talk about the glide path there for Q2 to Q4 as well.

Yes, to your point, Q2 is going to be the most year-over-year continued pressure, similar, maybe not to the full order of magnitude that we saw in Q1, but similar to Q1 and Q2, driven by the increase in marketing costs year-over-year. We'll lap that in Q3 and see operating expenses come in more in line with prior years. We get into Q3 and then into Q4.

That's helpful. And then this last one from me, within the down 1.7% comp for the quarter, can you break out traffic and ticket and any commentary there on quarter-to-date as well?

Yes, the comp was up about low-mid-single digits in ticket, so up about 4% in ticket, and down mid-single digits in traffic.

Thank you. Our last question comes from Bret Jordan from Jefferies. Please go ahead.

Good morning. Guys, on the working capital, hey, on the AP-to-inventory, I guess it's at 185% versus whatever you said, 202%. Is there just given I think what was sort of a guide to a lower even margin and a leverage ratio a bit over 3, I guess in a trailing 12-month basis, is there any pressure on the factoring program? I mean, is there any bias to, you know, funding more inventory, you know, just given the factoring costs go up with leverage?

Yes, we've seen, you know, in the supply chain program, really good support from the bank group, right? We've had some turnover of funding sources, but still able to fully fund the program and, you know, obviously great participation from our vendors as well. So nothing to really report on the factoring program. The working capital deficit was really driven by timing, as we said, of payments. Part of that was in accounts payable, where we just had some amounts coming due on the factoring program from the prior year purchases, which were elevated, as we know, relative to this year's purchases, which we know have come down. And so that just caused a little bit of a cash outflow in the current year. And then some timing of insurance payments and payroll at the end of the quarter relative to the prior quarter as our pay cycles kind of shift because of the odd number of weeks in the quarter. So all of that we expect to largely kind of retrace over the next couple quarters and don't expect working capital to be a significant use of cash for the full year.

Okay. What's the risk spread above SOFR on that factoring program?

It's all negotiated between the vendor and the bank. The company does not have any input into the rates at which that is negotiated. Our current borrowing rate increment in our revolver is SOFR plus 225. So that's obviously a benchmark that some of those conversations between the vendor and the bank start at.

Thank you. We have no further questions. I would like to turn the call back over to Mr. Peter Fitzsimmons for any closing remarks.

Well, thanks again everyone for joining today. We're pleased with the progress Monro has made, and we're optimistic about the opportunities in front of us. I'm confident that the company is well positioned to capitalize on the operating improvements we've put in place in the last 12 months. Forward to keeping you updated on our progress in the quarters to come. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Good morning, ladies and gentlemen, and welcome to Monro Inc.'s Earnings Conference Call for the Fourth Quarter and Full Year of Fiscal 2026.[Operator Instructions] And as a reminder, this conference call is being recorded and may not be reproduced in whole or in part without permission from the company. I would now like to introduce Felix Veksler, Vice President of Investor Relations at Monro. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we will be referencing a presentation that is available on the Investors section of our website at corporate.monro.com/investors.

If I could draw your attention to the safe harbor statement on Slide 2, I'd like to remind participants that our presentation includes some forward-looking statements about Monro's future performance. Actual results may differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Monro's filings with the SEC and in our earnings release.

The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, on today's call, management's statements include a discussion of certain non-GAAP financial measures, which are intended to supplement and not be substitutes for comparable GAAP measures.

Reconciliations of such supplemental information to the comparable GAAP measures are included as part of today's presentation and in our earnings release. With that, I'd like to turn the call over to Monro's President and Chief Executive Officer, Peter Fitzsimmons.

Thank you, Felix, and thanks to everyone for joining us. Great to be with you today. This morning, I'd like to update you on our progress and the momentum we've continued to build at Monro despite a challenging fourth quarter. Since we completed our store closure program nearly a year ago, my comments today will focus on the 3 remaining key performance improvement initiatives you are already familiar with, which are driving profitable customer acquisition and activation, improving our store-based customer experience and selling effectiveness and increasing merchandising productivity, which includes mitigating tariff risk.

After that, I'll briefly touch upon our fiscal fourth quarter results as we continue to implement our performance improvement plan to enhance Monro's operations, drive profitability and increase shareholder returns. Let's start with driving customer acquisition and activation on Slide 3.

During the fourth quarter, we continued to refine our marketing program by adjusting digital marketing spend, further refining our CRM outreach and optimizing call center support to more than 830 stores. We are more knowledgeable today about how to adjust our ad spending as a result of all the information we have gathered since we first introduced digital marketing last July. We use industry standard and company-specific metrics to determine where our marketing dollars have the most impact. Our objective is not to only continue driving new guests to our store locations, but also to improve our ability to retain existing customers, especially those of highest value to Monro.

And as a reminder, these are repeat customers that visit us over a number of years, and they choose us because we provide both the tire and auto aftermarket services that meet their vehicle needs. We have also enhanced our ability to allocate the appropriate method of advertising, that is digital, CRM and other media as well as the specific content, Tires, Front/end Shocks, et cetera, to meet specific market or customer needs.

For example, extra tire marketing in one district, incremental oil traffic building in another and cross-category marketing through CRM, that is brakes, tire, oil to the multiservice need customers that we've already identified as particularly attractive. This does not require us to increase marketing spend from our current run rate, and our efforts to optimize may trim current spend. 9 months ago, our marketing effort was similar across our entire store network. Now we have the capabilities to customize our approach to a variety of regional needs. Now let's discuss the things we are doing to improve the customer experience and selling effectiveness in our stores. Our ConfiDrive inspection tool has become the cornerstone of our customer experience transformation. We successfully expanded its usage to nearly every customer vehicle that enters our service base, ensuring comprehensive vehicle assessments across our entire network.

During the fourth quarter, we intensified our training efforts with technicians to guarantee both the completion and accuracy of these critical inspections. The ConfiDrive process enables our store managers to provide transparency about vehicle condition to our customers. Our goal is to help our guests identify and prioritize what they need to do to keep their vehicles safe.

Our ConfiDrive process is designed to build trust with our customers through a quality diagnostic supported with pictures to truly show areas that require attention. Safety, trust and confidence on the road is what we want to deliver for our customers. This transparency isn't just about building trust. It's about fundamentally changing how customers perceive automotive service. When customers can understand exactly what we're seeing through detailed visual documentation, it eliminates the skepticism that has historically plagued our industry. In addition to ConfiDrive, we have further developed our district manager toolkit, which we first described on a recent earnings call to more precisely identify which levers to pull to generate incremental sales, improve gross margin or just adjust staffing levels.

We believe this has allowed us to evolve our analysis from simply identifying sales trends to a more holistic view of how we would improve store contribution by enabling our district managers to better coach each of their store teams.

These tools, coupled with our efforts to steadily increase the quality and capabilities of our field teams will allow us to drive greater accountability with sales improvement and higher store contribution over time.

For example, we have recently rolled out an enhanced district manager toolkit to approximately 150 stores. This enhancement focuses on gross margin opportunities at underperforming stores and enables us to adjust operating performance at the local level. We are encouraged by the profit improvement we've seen in many of these store locations. We expect this process to improve store profitability across the network as we roll this initiative out further. Now let's turn to merchandising, including mitigating tariff risk. During the fourth quarter, we nearly completed the reset of our tire inventory across stores, shifting to a more focused assortment and guest-aligned offering that is resonating with customers despite challenging market conditions.

The new assortment has helped us navigate an ongoing customer shift to lower-cost Tier 4 and opening price point tires. -- a trend that continues to pressure the overall industry. To the fourth quarter, we turned our focus to improving assortments and offerings across our parts categories, applying a strategic category management framework to develop consumer-centric product and service offerings.

This isn't just about having products on shelves. It's about ensuring we have the right products available when customers need them, backed up by strong in-stock and on-demand inventory availability. A key driver of our assortment progress has been our intensified work with vendor partners.

We strengthened strategic relationships with our core suppliers while simultaneously working with our supplier base to improve inventory availability to ensure stores remain consistently stocked. -- we're investing in new demand and inventory planning capabilities, which are enabling us to manage supply more precisely at the same time as we expand in-store and same-day availability.

This balance requires sophisticated forecasting and rapid response capabilities that we're still building out. As it relates to potential pricing adjustments, we continue to work closely with suppliers to understand and manage costs in what has become an exceptionally dynamic environment.

As in the past, we expect to deliver competitive prices for the services we offer, also taking into account market conditions. We're closely monitoring potential product cost impacts from new tariffs as well as ongoing geopolitical tensions in the Middle East. And we're proactively developing strategic pricing scenarios to protect profitability while also remaining competitive.

We're particularly focused on expanding our share in tires and oil, 2 of our key traffic-driving categories, but we're doing so in an environment where consumers are demonstrably continuing to defer their spend on high-ticket categories such as tires. This creates a challenging dynamic where we need to drive volume while managing margin pressure. Pricing will continue to be a critical lever as we work to maintain the right balance between customer value and margin performance. Now let me briefly touch on our fiscal fourth quarter results, which Brian will cover in more specific detail in just a few moments.

Turning to Slide 4 of our presentation materials. Our fourth quarter was challenging with comparable store sales declining 2% -- this performance reflects the difficult operating environment in the full-service auto aftermarket we've been navigating, but it also demonstrates the resilience of our operational improvements in the face of significant headwinds.

As we believe was the case with other tire sellers, the primary driver of our comp store sales decline was persistent weakness in tire units that began in fiscal January and continued throughout the quarter. We experienced a 5% decline in tire units during the quarter, which we believe aligns with broader industry trends. Our tire category was pressured as consumers continue to defer spending in higher ticket categories and gravitated toward lower-cost alternatives. Further, fiscal February presented additional challenges when severe winter weather across our geographic footprint forced temporary store closures and significantly reduced customer traffic. Similar to what other automotive service companies experienced, the extreme weather disrupted normal service patterns and kept customers off the roads during what would have been a busy winter maintenance period. However, we saw improvement as we progressed through the quarter.

Both comparable store sales and tire units showed sequential improvement in fiscal March, partially recovering from the February weather disruptions. Store traffic also improved sequentially, giving us confidence that the underlying demand for our services remains intact despite a challenging backdrop.

One of our most significant accomplishments during the quarter was the transformation of our tire screen across our store network. This wasn't simply a cosmetic change. We fundamentally reimagined how we present tire options to customers, making the selection process more intuitive and aligned with customer needs and budgets. Despite the overall sales challenges, our higher-margin service categories continued to deliver value to our many full-service customers and reinforces our strength as a full-service provider. This capability serves as proof that our store teams are effectively utilizing ConfiDrive to identify and communicate service needs to customers. When customers can see documented evidence of their vehicle's condition, they're more likely to spend on necessary maintenance and repairs even in a constrained spending environment.

Our gross margin performance was a bright spot, expanding 90 basis points year-over-year to 33.9%. This improvement demonstrates productivity gains from our labor force even as we navigate cost pressures and shifting consumer preferences towards lower-tier products. Importantly, we maintained our marketing investment throughout the quarter despite the sales headwinds.

While it might have been tempting to reduce marketing spend during uncertain times, we firmly believe that backing away from marketing during challenging periods would be counterproductive to our long-term growth objectives. Our customers need to know we're here and available to serve them, particularly when economic uncertainty makes them more selective about where they spend their automotive dollars.

As a reminder, Monro delivered positive comp store sales in fiscal 2026 for the first time in 3 years, closed 145 stores that were not going to reach our performance expectations and dramatically improved our inventory position. And while the fourth quarter tested our resolve, our results for the full year of fiscal 2026 also validate that our strategic initiatives are working well over time and position us to capitalize when market conditions improve. And while our business rebounded in April with comp store sales that were up almost 1%, our May month-to-date comps are down approximately 3%.

We believe the primary driver is that certain customers are feeling increased pocketbook pressure as a result of recent increases in gas prices as well as other related costs. Before I hand the call over to Brian, I'd like to take a moment to say that none of the progress we've made would be possible without our more than 6,000 valued teammates across 1,115 stores who execute these initiatives every day.

They're the ones implementing ConfiDrive inspections, having difficult conversations with customers about needed repairs and maintaining service excellence despite a challenging macroeconomic environment. Their commitment during this transformation period has been exceptional. We've also significantly strengthened our leadership team in the last year, adding key talent and promoting from within across merchandising, marketing, stores and finance. These additions haven't just filled positions. They've elevated our capabilities and brought fresh perspective to long-standing challenges. The depth of our leadership bench today is substantially stronger than it was when we began this transformation. Finally, the traction we're seeing in some districts across our chain in tires and service categories reinforces that we have the ability to drive significant value for our customers that we believe will translate to sales and profit growth. And with that, I'll now turn it over to Brian, who will provide an overview of Monro's fourth quarter performance, strong financial position and additional color regarding fiscal 2027. Brian?

Thank you, Peter, and good morning, everyone. Turning to our results, Sales decreased 7.2% to $273.8 million in the fourth quarter. This was primarily driven by a reduction in sales from the closure of 145 underperforming stores in the first quarter of fiscal 2026 as well as a 2.4% decrease in comparable store sales from continuing store locations. For reference, comp sales were up 1% in January, down 5% in February, and we exited the quarter down 2% in March. Our tire category was down 2%, driven by a 5% decline in tire units in the quarter. Gross margin increased 90 basis points compared to the prior year. This primarily resulted from lower technician labor costs as a percentage of sales, which were partially offset by higher material costs and higher occupancy costs as a percentage of sales.

Total operating expenses were $98.1 million or 35.8% of sales as compared to $121.1 million or 41.1% of sales in the prior year period. The decrease was primarily driven by $22.5 million of higher store impairment costs in the prior year period related to certain owned and leased assets, $6.9 million of lower costs from the closure of 145 underperforming stores in the first quarter of fiscal 2026 and a decrease of $1.8 million in management restructuring and transition costs.

These were partially offset by $6.9 million of increased marketing costs to support our top line and $2.7 million of costs incurred in connection with consultants related to our operational improvement plan. Operating loss for the fourth quarter was $5.2 million or negative 1.9% of sales. This is compared to operating loss of $23.8 million or negative 8.1% of sales in the prior year period. Adjusted operating loss, a non-GAAP measure, for the fourth quarter was $2.6 million or negative 0.9% of sales as compared to adjusted operating income of $1.4 million or 0.5% of sales in the prior year period. Net interest expense decreased to $4.1 million as compared to $4.4 million in the same period last year. This was principally due to a decrease in weighted average debt. Income tax benefit was $2.6 million or an effective tax rate of 28.6%, which is compared to an income tax benefit of $6.8 million or an effective tax rate of 24.3% in the prior year period.

The year-over-year difference in effective tax rate is primarily related to a decrease in unrecognized tax benefits as well as the impact from other adjustments, none of which are significant on the change in pretax loss.

Net loss was $6.6 million as compared to net loss of $21.3 million in the same period last year. Diluted loss per share was $0.23. This is compared to diluted loss per share of $0.72 for the same period last year. Adjusted diluted loss per share, a non-GAAP measure, was $0.16. This is compared to adjusted diluted loss per share of $0.09 in the fourth quarter of fiscal 2025. Please refer to our reconciliation of adjusted operating loss and income, adjusted net loss and adjusted diluted loss per share in this morning's earnings press release and on Slides 9, 10 and 11 in the appendix to our earnings presentation for further details regarding excluded items in the fourth quarter of both fiscal years.

As highlighted on Slide 6, our financial position is strong. We generated $70 million of cash from operations during fiscal 2026. Our AP to inventory ratio was 202% at the end of fiscal 2026 versus 178% at the end of 2025.

We received $3 million in divestiture proceeds, invested $32 million in capital expenditures, spent $39 million in principal payments for financing leases and distributed $35 million in dividends. As it relates to our closed store real estate dispositions, we have continued our process to exit the real estate at these locations, which includes 40 owned stores.

During fiscal 2026, we successfully exited a total of 72 leases and sold 26 locations, which resulted in cumulative proceeds of $25 million. This leaves us with a remaining balance of 47 stores that have the potential to be monetized during the next several quarters. At the end of the fourth quarter, we had net bank debt of $45 million, availability under our credit facility of approximately $410 million with cash and cash equivalents of approximately $15 million.

Now turning to our expectations for the full year of fiscal 2027 on Slide 7. We expect to deliver year-over-year comparable store sales growth in fiscal 2027, primarily driven by our performance improvement initiatives. We expect the results of our store optimization plan will reduce total sales by approximately $9 million in the first quarter of fiscal 2027.

Given continued cost inflation, we expect that our gross margin for the full year of fiscal 2027 will be consistent with fiscal 2026. We expect higher selling, general and administrative expenses as we invest in additional marketing to support top line growth. We expect to generate sufficient cash flow and have ample liquidity to fund our capital allocation priorities during fiscal 2027.Regarding our capital expenditures, we expect to spend $25 million to $35 million. And with that, I will now turn the call back over to Peter for some closing remarks.

Thanks, Brian. Through our national retail network, economies of scale and durable business model, we continue to believe we can both provide our customers with the services they need and generate meaningful value for our shareholders in any economic environment. Our balance sheet is strong, and our business generates healthy cash flow. We remain encouraged by the progress we have made on executing our plan to improve operations, drive profitability and enhance total shareholder returns. But consistent with that and as part of our commitment to continuously evaluate opportunities that enhance shareholder value, our Board determined that now is the right time to conduct a broad review of strategic alternatives, which we also announced this morning. Before we turn to Q&A, I would like to take a moment to address this announcement. With the support of our independent financial and legal advisers, the Board will consider a full range of potential opportunities, including, but not limited to, asset sales, refinancing of the business, strategic acquisitions and operational improvements or sale of the company.

We are in the early stages and as is typical in this type of process, there's no deadline or definitive time line set for the completion of the strategic review, and there can be no assurance that the review will result in any particular transaction or other strategic outcome.

We do not intend to make any further public comments on the process unless and until we determine that further disclosure is appropriate or necessary. We remain focused on delivering great service for our customers while we explore all options to maximize value for our shareholders.

As such, please note that the purpose of today's call is to discuss our fourth quarter and fiscal 2026 financial results and our expectations for the full year of fiscal 2027, and we ask that you keep your questions focused on these topics. With that, I will now turn it over to the operator for questions.

[Operator Instructions] Our first question comes from Thomas Wendler from Stephens...

I just want to kick things off with what you're seeing in retail material costs right now? Have you seen any increases in pricing from the increases in crude flowing through? And then maybe what your expectations are as that does eventually flow through to material costs and the impacts to your gross margin?

Sure. Thanks for the question, Tom. I think as everybody probably knows, there's a likely increase in oil costs. And so we're expecting that to have an impact.

We also have very good relationships with all of our vendors, and we're watching, as we said in our presentation, where we might see other inflation or input cost increases, and we're prepared to adjust whatever we need to in order to continue to make money.

Perfect. And then maybe just touching on fiscal quarter 1Q '27. As you mentioned, you saw some strength in April, but May looks a little bit soft. Maybe can you provide any additional color there, the drivers on the traffic and the ticket front?

Well, as we indicated and as we know from what's going on in the industry, there's certainly pressure on certain customers. And the impact of that on our business is that we have some increased volume in Tier 4 tires. I would point out that we're also doing quite well in selling Tier 1 tires.

So not unlike past times, there's a barbell effect here in play. So that's one factor. We know that the combination of tires and service that we offer is valuable to our customers. They may have deferred some maintenance in the last month or 2, but we continue to see significant strength in a number of our districts and regions across the country.

And so we're optimistic that as time passes, we'll get through this current uncertainty and the value of our service offering will continue to be powerful to our customers.

Perfect. Maybe I'll try to sneak one more in here quick, actually. You mentioned the trade down into the Tier 4 tires. Can you maybe provide us some color on what percent of the tires were in Tier 4 in 4Q '26? And then maybe just remind us the price difference between those Tier 1s and the Tier 4 tires.

Sure. No problem. Brian, do you want to take that one?

Yes. Our percentage in Q4 was about 30% in Tier 4. Just for reference, historically, in a year ago, that was about 25%. So we have seen, as Peter said, growth in the Tier 4 category. And the price differential across tiers is typically $20 to $30 up and down the assortment.

Our next question comes from David Lantz from Wells Fargo.

In light of quarter-to-date comps tracking down, let's say, 1% or so, curious if you can walk through the drivers of your expectations for positive comps for the full year.

David, thanks for the question. The combination of our initiatives, marketing, merchandising and store performance, we think, enables us to drive positive comp store sales for the year. That is our goal, hasn't changed. So while the realities of the current market have interfered with the timing, we still expect to generate positive comps for the full year.

Got it. That's helpful. And then SG&A dollars are expected higher year-over-year. So curious if you can talk through kind of the shape of the year in terms of Q1 through Q4.

Yes, absolutely, David. Thanks for the question. As you know, our marketing really started to increase year-over-year in our Q3 and Q4. So I think it will be in our Q3 that we lap that incremental spend. So I would say that there's probably a little bit more opportunity for SG&A pressure in the first half of the year until we lap that marketing spend.

Got it. That's helpful. And then can you just break out ticket and traffic for the quarter as well?

Sure. Ticket was up kind of mid- to high and traffic was down high single.

Our next question comes from Bret Jordan from Jefferies.

On Slide 7, you talk about cash flow to fund capital allocation priorities. Where does the dividend play out here if we're looking at sort of some pressure on EBIT margin in '27?

Yes, Bret, I appreciate the question. As you know, our Board looks at the dividend on a quarterly basis. As we look at our cash flows, we have the intention to continue to fund our historical capital allocation priorities, including the dividend, but the Board will review that on a quarterly basis, look at our current performance, projected performance, obviously, compliance with debt facility, all those things and make a determination on a quarterly basis. That hasn't changed. That's how it's been and that won't change.

Okay. And I guess when we think about the ConfiDrive and sort of the push to marketing of service, what percentage of cars that you're seeing are in for service only versus getting service attached to a tire sale? Like what's the traction on the service initiative? Or has that changed?

Not really. As you know, on an annual basis, about half of our business is tires and half of our business is service. We probably have a little bit more service traffic, and that's important to driving the overall value to our customers.

Okay. Great. And then I guess just the timing of the conversion, I think it's coming up this summer. Is that -- what's the date that, that Class C will go away?

That will be when we -- at the announcement date of our annual meeting, which is typically end of June or early July.

Our next question comes from Brian Nagel from Oppenheimer.

I apologize, I'm joining the call a little later. So my questions may be repetitive, so I apologize. Just as you look at the business, I mean, look, there's been a lot of talk about the kind of the health of the consumer broadly and then within your category. This most recent quarter, did the overall consumer environment, consumer demand environment get more challenging for Monro? Or is it about the same?

I think it's been similar in the quarter that just ended. As we indicated, one of the challenges we had in the quarter was the February weather disruption. And as we commented in our opening remarks, we saw an increase in -- a sequential increase in performance in March over February.

I think the consumer has continued to prove to be resilient, but I think it's a reality that they're experiencing pressure on the pocketbook. And as a result, they're going to continue to evaluate exactly how to spend their automotive dollars very carefully.

Then I guess my follow-up question related to that, with gas prices having now climbed significantly, I guess oil price may be pulling back a little bit at the moment. But I mean, still up significantly from where they were. I mean how do -- how should we think about higher gas prices as a factor for Monro, both from a consumer demand standpoint as well as from an input cost?

Well, as it relates to input costs, we know that oil costs are going up, and that may affect oil pricing, and it could affect input prices on tires. We -- as we have mentioned previously and again today, expect that we'll continue to monitor the impact of cost increases on our overall strategy. Brian, do you want to add to that?

Yes. I would say that there's obviously other input costs outside of materials that are embedded in our material costs like freight and logistics costs. So those are all things that increase and we need to find places to pass along during the period of rising costs. But at the same time, to your point, you have a consumer who is dealing with higher energy across the board, not just in gas prices and higher other related costs across their budget that is more discerning about how they spend their money, particularly that lower to middle income consumer.

And so I think that's why we're seeing the strength we are in Tier 4 and lower tiers. And at the top of that K-shaped kind of recovery, you see the barbell that Peter talked about in Tier 1 being a point of strength as well. So it's a balancing act like we mentioned in our comments about price and volume and attracting a consumer who is price sensitive while we're kind of facing some cost pressures. But we have the enhanced capabilities in our merchandising team and merchandising tools to be able to manage that.

And I would just add to that last point that in the fourth quarter and now, the combination of things that we've been doing for 9 or 12 months, which is investing in marketing, improving our performance in the store using our inspection tool and improving our assortment of tires is meeting customer needs.

And I think that's really important. As you know, we enhanced our Tier 4 tire offering in the last few months, and that was timely because the market needed that tires. But again, at the same time, we enhanced our Tier 1 -- Tier 2 and 3 also, but Tier 1 tire offering, and we've seen growth there. So in order for us to continue to be successful, I think those initiatives that we put in place about 9 months ago will need to impact our entire network. But we absolutely are seeing improvement and positive comp store sales in the fourth quarter and as we sit here today in a number of our regions and districts across the country.

Our next question comes from John Healy from Northcoast Research.

I -- would love to get your guys' thoughts about kind of what you saw through Q4 as it related particularly to weather. I think for a while, we've been hoping for a winter weather season that would spur demand and felt like we got it, but didn't see it in the industry. So trying to understand kind of why that didn't catch up. I understand stores could be closed, but you would think that the business would catch up in the week or 2 preceding it. And now in the 6, 7 weeks after even the spring has arrived here. So just what are your thoughts on weather? And why has it not helped the industry this calendar year?

So a comment or 2 about the cadence of the fourth quarter. We were up a little bit in January. But towards the end of the month, we began to see the impact of winter weather. Remember, our February is 5 weeks, and there was a storm in the very early part of our fiscal February and another storm that affected at least half the country in the last week of that 5-week month.

And our stores were closed for a short period of time. It was less store closings and more of the consumer just wasn't going to come out in many parts of the country given the severity of the winter weather. In March, we saw improvement. In April, we saw improvement. And so I think the weather impact on our fourth quarter was primarily the month of February and the way that February timing worked.

Understood. And I wanted to ask about the SG&A dollars. For a long time, this has been a company that hasn't increased its SG&A spend annually for a number of years. I feel like it's always been in a pretty steady state. And I know you guys have had some success recently with same-store sales kind of popping up slightly positive on a quarterly basis.

But for this business to really get what I would say, real same-store sales that can move the EBIT dollars, let's say, 4%, 5%, my guess is that's where you need to get to before you really grow earnings per se. What sort of like SG&A do you think the company needs to invest in the business to drive that? And when you spend on SG&A, how long does it take to actually get a return on it, do you think?

Well, John, as it relates to SG&A, you're right, the company has done a good job of finding cost reductions, productivity improvements to offset inflationary pressures, particularly in that post-COVID time period where inflation was peaking.

We did things in the back office like offshoring and outsourcing some of our noncustomer-facing and transactional work across the business, and it had meaningful $10 million plus cost savings benefits over time. So you're seeing the benefit of a lot of that, I would call it, non-demand impacting SG&A is really where we've been able to save.

I don't think that we've I would say, underspent in other areas outside of the places where the performance improvement plan has started to put investments in place, like people and tools around merchandising, marketing, the ConfiDrive tool and the field district manager toolkit.

And the largest of those being is the incremental marketing spend that we're now spending relative to where we were spending before. So I would say that the investments that we think that we need are baked into the outlook that I gave relative to higher SG&A expenses, particularly in the first half of the year until we lap the incremental marketing. And I think that we believe that, that marketing is important to keep in place in order to do exactly what you just said, which is to drive positive comparable store sales. Peter, I don't know if there's anything to add.

Yes, I do have a comment, John. With respect to marketing investment, you'll remember that last year, we provided digital marketing support to more and more stores from July through December. And a lot of that was Google Search and pay-per-click, and that absolutely drove sales and gross margin dollars throughout the second half of last year.

This year, in addition to continuing our investment in digital, we're investing in customer relationship marketing, which has always been part of what we do, but we're able to be more targeted. And so the interesting thing about what we've seen in the first number of months this year is the combination of different types of marketing is driving in many regions, incremental sales over prior year.

It doesn't work every month, but when we say we're optimizing marketing, what we mean is we're using all that information we've collected over the last 9 or 10 months to make the right decisions about where we need to invest either digital or CRM or even more call center support to drive improved performance in those parts of the country that need it most.

So I would say one thing we emphasized on our call today, it's really important for us to continue that very specific type of marketing investment. And as it relates to digital, we really didn't do much of that until July of last year. And we saw the impact in the second half of last year. We saw it in the first quarter, and we're continuing to invest, but we're able to make better decisions based on data about exactly how we allocate those marketing dollars.

[Operator Instructions] We have no further questions. So I'd like to hand back to Peter for any closing remarks.

Thanks very much. And thanks again, everyone, for joining us today. We're pleased with the progress Monro has made in fiscal 2026, and we're optimistic about the opportunities in front of us. I'm confident that the company is well positioned to capitalize on the additions to the team and the operating improvements we've put in place during fiscal 2026. I look forward to keeping you updated on our progress in the quarters to come. Have a great day.

Thank you. This now concludes today's call. Thank you all for joining, and you may now disconnect your lines.

Thank you, everybody. I'm Michael Lasser, the hardline, broadline and food retail analyst from UBS. Welcome to the afternoon session of our UBS Consumer and Retail Conference. I don't think we could find a better way to kick off our afternoon session, then with the team from Monro. To my immediate left is a fixture of the UBS Consumer and Retail Conference, Brian D'Ambrosia, who is Monro's Chief Financial Officer; and to his left is Felix Veksler, who is the Vice President of Investor Relations, I am very grateful to both gentlemen because I think this might be 7 or 8 years where Brian's been very great tug graciously attending our conference.

So we've had wonderful updates, conversations and stories throughout that time, which is where I want to start because, Brian, you have been a very stable force in the Monro organization against the backdrop of what's been a lot of change over -- you've seen 3 CEOs over the last several years, some different strategic initiatives that have been put in place, some changes to the footprint today. There's around 1,100 locations. Can you give us a little bit of the retrospective. A little bit of what has happened and where does Monro and today as a place for us to frame our conversation.

Yes, absolutely. First, Michael, thank you for having us. I've enjoyed all 6 or 7 years, as you mentioned, and looking forward to our conversation today. I've been with Monro since 2013. I've been in the CFO role for about 8, 9 years now. And I would characterize Monro's history as one of really unit growth. And so that kind of frames a lot of the conversation about what we're working on now and what we've been working on. But that unit growth was one where the company started from small local regional business centered in Upstate New York to one that grew through significant acquisitions and bolt-ons to become at its peak about 1,300 locations. Originally really only focused on service and limited services now a broad range of automotive repair and replacement services and inclusive of 50% of the business being tires and tires services, which all happened through that acquisition in an M&A process.

So with that, I think, creates the growth, the scale and the relevance to the consumer that comes with a national footprint. But also, I think what it comes with is some of the growing pains and some of the integration or even missed integration opportunities that you have to truly build a 1,300 location platform.

So a lot of the work that's happened over the last handful of years has been really putting in place the tools and processes to operate as a platform, not only in our merchandising in terms of how we go to market, how we buy our supplier relationships, where our specific brands are positioned and how we think about our different brands and their role in other geographies we participate in, but also in-store, how we really leverage the capabilities we have across the chain to deliver a good experience in all of our locations through a standardized, repeatable process using standard tools and ways of going to market and doing business.

So that's where a lot of the work has been is standing those tools up and there was a lot of foundation building, I would say, over the last 5 years, getting our stores wired and ready for the technologies we want to implement, standardizing across things as simple as phone systems, as complex as digital courtesy inspection tablets, moving from paper-based to electronic scheduling, right? Just things that are blocking and tackling for a large operator.

With a lot of that foundation building behind us, where we're at today is really implementing the tools, processes and guest experience we want that sits on top of that. And it's leveraging a lot of those tools that we've already put in place, but it's also bringing new tools to market and to bear to enhance that. And that's a lot about what we'll talk about today is the focus that we've had over the last couple of years on our internal operations, having brought the platform to something that can be now the foundation for the next round of unit growth of Monro.

Got you. Very helpful. That is a great starting point for our conversation. And before we get into some of the strategies that are at the heart of what Monro is trying to achieve, I want to talk a little bit about the industry, because it's been a fascinating industry. It has been a bastion of fragmentation for a long period of time. Monro was very at the forefront. There was a pie in the year in creating some of the consolidation across the auto services sector. Where does that consolidation stand today? How -- it's still reasonably fragmented. There's a few larger players, but how do you see that playing out?

Yes, it's a great question. I think that what we identified during our roll-up opportunity has become more widely known. And certainly, starting with the industry, the auto aftermarket is a place that has really strong, durable, long-term trends at its back. The first is the aging car park right? We know the cars are getting older. I think it was 10-plus years was when I first started, maybe even 9 and now we're over 12, 13 years old for the average age of vehicle on the road. We know that those vehicles are being driven. While we had a step back during COVID in terms of vehicle miles traveled during shutdown, we're back to higher than pre-COVID levels in terms of vehicle miles traveled and the complexity of those vehicles, we know continues to increase, making the do-it-for-me section of the aftermarket, a faster grower than the DIY, which is obviously where Monro plays.

So on top of all those really good long-term trends and the fact that most of the categories are nondiscretionary, your car needs them, whether you want them or not. It makes it attractive in a very investable space in nearly all economic environments. That, on top of the significant fragmentation really lends itself to the M&A activity that I would say, like you said, Monro pioneered and then ultimately has been really expanded upon by other strategic and financial buyers. And there's 120,000 service locations in the U.S. I would say that if you looked at the number of locations that the top 10 have, it's probably only about 15%. But there's a significant tail in terms of undone consolidation or remaining consolidation to happen.

So I think it remains an investable space. If you look at the overall market, you're -- there is significant competition in addition to those 120,000 locations, which includes not only mom and pops, but the national chains, but we also obviously compete with club stores and mass merchandisers. You've got dealership locations on top of that as well. And then, of course, you have online sellers of tires like you -- Amazon and other online tire rack, other online tire sellers. So it's a pretty diverse market we compete in, in a very fragmented as it relates to the physical location.

Got you. Very helpful. And the recent topic that folks have been very in tune with is just the geopolitical conflict and what the rise in the price of oil might mean for consumer behavior. What have you seen in the past? How are you thinking about this? Could this -- is there a level where gasoline gets to that starts to create demand destruction? -- what's been -- what's been the case of how you looked at that?

Yes. Traditionally, we only have history to go on, and every economic cycle is different. But traditionally, we would have to see up towards $5 oil, gas gallon of gas for us to see any of that significant demand destruction. I think currently, we're a ways away from that. But obviously, those are the levels that we would see a change in consumer behavior.

Yes. And what has been your observation around the state of the consumer. There's been a lot of talk about these bifurcated trends. Monro's seen it a little bit in terms of it's tire business where some of the more opening price point tires have done a little bit better and maybe that's more a price-sensitive consumer. So how would you describe the overall state of the consumer?

Yes. I would say that the K-shaped economy or recovery is what we see across our consumer base -- our customer base. To your point, we have a wide I would say, demographic of customers that we serve. We serve the low-end consumer who's looking for true value and price point in terms of Tier 4 tires. And we serve a middle to higher end consumer who might just be moving away from the dealer and coming into the aftermarket. And we see different behaviors. We see still the need to invest in those -- in their vehicles. Because, again, it is a need-based purchase, but we do see the lower end consumer continuing to push down towards the lowest possible ticket that they can have on each visit and we see that middle to higher income consumer, continuing to invest and bundle services with the reason that they came in upon recommendations that we find.

So I think that because of that, it's -- and we've done, and we'll probably get into it as we talk here. We've done some segmentation work. There's different ways that we talk to those consumers now. There's different ways that we're thinking about our marketing efforts in terms of attracting certain segments of that. And it certainly is affecting the way we're thinking about our lower tier offerings in order to provide maximum value but also preserve and track growth in margin.

Got you. Monro done a little bit of a different fiscal year have yet to provide an outlook for the year end and not asking you to do it. Felix, don't give me those legs. But it has been a very in the technical term funky winter, I'm sure you have experienced that in Rochester. This is -- it's very treacherous pole season, which is going to have a strong influence over some of the spring maintenance done, especially as those vehicles ride over, and that has an influence on the underbelly of the car, the shocks. How are you thinking about all of this? And then on top of that, some inflation that's being passed through as a result of all the factors that we -- that have long been talked about.

It certainly is a dynamic environment. I think that what we saw, at least if we look back, what we've seen is the trading down, like you said, we talked about earlier to of the consumer to opening price point tires from Tier 1 down to 2, 2 to 3, 3 to 4. And we've seen that not as a new phenomenon, but just a continuation. I think this was something that we may have even talked about last year or perhaps the year before, even that post COVID and post inflationary, I would call it, shock of the stimulus post-COVID.

As prices stepped up, consumers definitely walked at some of those increases from the branded manufacturers and started to trade down into maybe brands that they were less familiar with, they're even nonbranded tires. And that dynamic has continued. You see a continued kind of pile up in the Tier 3 and 4 levels of consumers, and it's come at the expense of some of the Tier 1 and 2 volume. That persists and that kind of stays in the background. And we've got strategies in place to make sure that we're assorted for that new dynamic, make sure that we have opening price point tires in FY '27 that allow us to make better margins than we did in FY '26. That's a lot of effort by Katie Chang and our merchandising team. We also have consolidated a lot of our volume and continue to behind fewer strategic brands and expect to be able to execute in the stores to sell more of our tires out of those brands, which keeps more tires in our assortment being sold, which provides better value for our guests but also help us to achieve volume rebates and better pricing.

So that's one way that we've combated that kind of prolonged trade down that doesn't really show many signs of reversing. Anything, a little bit of a barbell is occurring where the Tier 1 for the high-end consumer, the Tier 4, they're piling up and maybe leaving Tier 2 and 3. As it relates to other economic pressures, we expect that and plan for a continued current environment.

We know that the consumer may get a little healthier here over the next couple of months as tax refunds start to hit their bank accounts. We've positioned our marketing efforts, our merchandising efforts around capitalizing on that hopefully disposable income that they have to be able to reinvest back in their vehicle. And then as it relates to the weather dynamics on top of all that, we benefited from an on-time winter this year. November was a good, good amount of snow in the Northeast. They got our tire selling season off to a good start as we reported in our last earnings call. But since then, the industry and we talked about it in our January call, and I think Goodyear talked about it on their call, and it shows up in the syndicated data, it remains soft and tire units were soft in January and some have an outlook for a continued soft quarter for this quarter ended in March.

But you can't control all of that. What you can control for is the things that we're working on to take share, win share and sell more tire units in any environment.

Two last questions in this regard. Number 1 is, are you seeing deferred maintenance in other areas of your business, classic behavior where that replacing 2 struts instead of replacing 4 struts or shocks, someone might replace 2 or other indications that, that prolonged deferral cycle is continuing...

Yes. I would say that the most pronounced trade down and deferral is occurring in tires. And I think mostly, it's the most economically sensitive because of the higher price point. It's the highest ticket that we have on our service menu. But at the same time, as you move down into lower tier tires, we see lower attachments to those consumers.

So a more economically sensitive consumer is going to buy lower tier tires and they're also less likely to attach an alignment to that tire or to buy road hazard or to potentially get those other services you mentioned done. But we do have still a lot of our consumers that we would kind of consider in that bundle where they're going to come in and they're going to listen to the recommendations that you give them and they're going to -- they have the financial wherewithal and the commitment to that vehicle, knowing that perhaps the ultimate thing they can't do is afford a new vehicle.

So the trade down into maintaining their current vehicle is one that they can afford and they'll invest in. Those are the consumers through our marketing efforts that we are really targeted on bringing more of into our store. And we've done a lot of things tactically and technically to put more of our advertising and more of our marketing in front of their eyeballs.

Got you. Last one on the -- more on the bigger one. One is, given all this disruption that's happening in the Middle East, could you envision any supply chain disruptions that could interfere with your ability to service your customers?

We have not seen anything in our planning that would cause that. I think there is a good amount of supply onshore as we speak and still other parts manufacturing that isn't necessarily dependent on some of those areas that are under the most pressure, right?

Got you. Very helpful. And then on tariffs and pricing, obviously, there's a lot of noise and change, and it's quite a dynamic environment. How do you think about the rollback of EPA tariffs, sectoral tariffs that could come in place that will impact the categories that you service and then the various dynamics on pricing.

Yes. It's not easy, it's because we -- as a buyer through distribution and from manufacturer, we don't have -- and when we went through this when we were looking at the first round of tariffs, we don't have perfect visibility in the country of origin, right?

So we really, as a strong vendor partner, we are able to work with our suppliers to get to that level of detail, but it's not initial visibility that we have. So when we work through that, and we've done a lot of cost segregation in terms of, okay, what are the costs subject to tariffs that are in our cost and not. I think we're able to have robust conversations with our vendors and the appropriate level of pass-through that we should bear relative to the manufacturer distributor as you look at the overall supply, the overall value chain to the consumer. That being said, with the rollback of EPA First of all, that doesn't change the 132 auto tariff.

So that remains in full of...

It's an important point because..

It's important point because that's where it was affecting a lot of our cost is related to that. We had on the tire side, much very little product coming out of China, which I think is the best -- the biggest beneficiary of that EPA reduction. But at the same time, certainly, some of the hard parts are still being sourced from China from distribution and manufacturing.

So any relief that they experience certainly needs to make its way through the inventory cost because there are weeks of supply on hand already at those higher levels. And I don't think anyone's counting on the rebates yet given the complexity of how it seems like to even be able to apply for those in the systems needed to be stood up before that could even begin.

So we're beginning the conversations just like we did when tariffs were announced. We began the conversations with our vendors getting aligned on what the data is saying and what their strategy is around it and certainly expect that we'll be part of those conversations with all of our strategic partners and cost relief that benefits them will benefit us.

Two last ones. How do tires are they impacted by non-IPA tariffs at this point, such that if there's already sectoral tariffs in place for a lot of the goods that you're installing on cars, the great news is you have a little bit more certainty because there'll probably be some other categories that are now the subject to this. So how do you think about that?

Yes. I think that we don't see -- our initial path, particularly in the tire category doesn't show that we'll see a significant amount, like I said, of change related to this because we weren't sourcing a significant amount of tires from EPA jurisdiction. That being said, if the -- there's a change in the global tariff regime to help offset the loss of those -- that tariff revenue, we'll have to see how that impacts the jurisdictions that we are buying form?

We buy tires from Southeast Asia that don't have the IEPA tariffs surcharge, I'll call it, on top of the auto surcharge currently. But that doesn't mean that the Section 132 tariffs or other tariffs may not be put in place against those Southeast Asian areas to make up for the loss of the Chinese tariff.

Okay. And are you expecting pricing in a level of increase across the assortment that you're installing to moderate a bit?

Yes. We have not -- so one of the things that I think is important to understand is we've seen an increase in minimum advertised pricing from the branded manufacturers in response to the cost increases that have been passed along. So these are mandatory price increases that the manufacturers do to help protect the installer. But that -- some of that map increase is what has also stimulated the trade-down behavior by the consumer. So I think that any relief from the minimum advertised price will be helpful in timing and reversing some of the trade down activity.

Got you. Very helpful. So pivoting over to some of the actions Monro has taken to improve the performance of the business. There was some tough decisions that have been made closing some locations, probably the right decision even as they were difficult. What does the portfolio look like now? Which locations were closed and how healthy is the rest -- are the rest of the locations?

Yes, it's a great question. We announced on our earnings call in May, the closure of stores in June, which we did. So in our Q1, all stores were closed 145 locations. The way we identified those locations was we really looked at, first of all, performance, obviously, but went beyond that to look at the drivers of that performance and really looked at areas where the market had either moved away from the business or the demographics have changed within the areas that those stores were located. There were also some locations where when we purchased them, maybe that was the only store we owned, but we did a couple of bolt-on acquisitions afterwards. And all of a sudden, the landscape got a little bit crowded with those additional acquisitions purchased.

So we looked at all of that and made the decision based on store density, based on demographic data and also our any renewal terms that we had coming up that might have been onerous on these locations for lease locations. It made a decision that these were the 145 stores that really -- we felt wouldn't make the journey from a financial profile that we needed them to be at.

So we moved swiftly and close those within a couple of months and moved very quickly then. We got the inventory transfer, transferred the sales to other locations to the extent that we had that ability and then move quickly to monetization of the assets, and we've since of the 145 stores, about 82 of the stores are now fully off of our books and divest it. That's resulted in over $20 million of divestiture proceeds, which has allowed us to continue to invest in things like marketing and fund all of our capital allocation priorities as well.

So the importance of that is it's in our rearview mirror. We're focused on growth. We believe that we've got the rights to our portfolio as we stand today. Certainly, we're pressure testing that decision. Every time a lease comes up for renewal, the store as we say, is on trial for its life in terms of what's its role in our portfolio. and we make sure that, that store still has the right place in our portfolio. And we anticipate that we will still have closures, but there'll be of that kind of lease renewal type versus something that will be more proactive like we just did.

One last point is a good amount of 145 stores is moving back to our M&A strategy. You're going to pick up some stores that are less well situated than others. If you buy 10 locations, you might have 2 that you know down the road and might encounter some problems. And I think a lot of that -- the closures that we did in Q1 were some of that hygiene.

Yes. Got you. Very, very helpful. What does the store strategy look like from here? Like how aggressive can in Monro be from an M&A standpoint, opening new locations? Because this there is a big opportunity. It's a question of pacing against that opportunity.

100%. And we definitely believe that the M&A opportunity that is there for the entire aftermarket is one that Monro is well positioned to capitalize on. We've been internally focused, focused on really delivering what we consider to be kind of the first leg of the stool of our long-term comp algorithm which is our long-term top line algonithm, which is consistent comp growth. We wanted -- and we've done that over the last 4 quarters, we've delivered 4 consecutive quarters of comp store sales growth, first time we've done that in a few years. We delivered our first quarter this past quarter of 2-year stack growth.

First time we've done that in a few years. So we're starting to see those green shoots and some of those proof points related to the platform stabilization strategy that I talked about earlier. I think as you start to move on from that, then unit growth becomes the next logical conversation, particularly driven the fragmentation, but also the white space that Monro has. We don't have stores in Texas. We don't have stores in Arizona, we don't have stores in Colorado.

Three very good states in terms of new vehicle registrations and population migration into those states. The question is one of timing. We still want to make sure that we -- we don't take anything -- any foot off the gas and any distraction away from what we think is really important work that we're doing now. But at the same time, acquisitions don't always show up exactly when you want them. So I think our best what I would describe us as we're preparing to prepare and talk -- thinking about thinking about that kind of thing and making sure that we have the most -- first and foremost, which I think we've accomplished, we have the balance sheet available to do it. If you look at our balance sheet, I think we have $45 million of the last quarter and bank debt. That's a 0.5x, 0.4x on our bank debt to EBITDA leverage really affords a significant amount of dry powder for us when we're ready to deploy it.

What we'd like to see is continued progress in our initiatives and that truly and really translate into improved operating margin performance. Because I think as that improves, we start to see the ROIC move and we start to see the path towards really earning our right to grow.

Makes total sense. Let's dig into the factors that have driven those -- the string of same-store sales increases because it seems like it's a lot of internal initiatives, a lot of difficult execution factors that have led to more consistencies. So as you think about what has contributed to the success that's happened over the last 4 quarters, how would you rank the various contributors to what has been able -- what has enabled the organization to achieve this?

Yes, absolutely. I'll talk about it through the lens that we have talked about it on our earnings calls, which is through the 4 work streams. We touched a little bit about upon each one, but maybe I'll just double-click on a few of them.

The first, the closure of the stores. I think we need to spend more time on that, but it was very important to execute that quickly because what we didn't want FY '26 to be was an exercise and drawn out store closures where the organization was distracted from its growth initiatives side of store closures. And the important -- the truly important thing of that was our ability to get it done in 2 months.

And then, obviously, a small team of our real estate and facilities are working on the monetization of the assets. But the organization itself really was able to move on from that before Q2, even started. And that's allowed us to focus on, I would say, the next mature area for us, which is our marketing efforts. I would say that the first thing I'll highlight is Monro brought in a new marketing executive, Tim Farrell. And Tim came to us with experience at a private equity-owned auto service provider as well as a publicly traded oil business.

So in digital marketing, really strong with the needs that we had in terms of acquiring new customers and retaining our existing customers. So Tim, in partnership with our Alix Partners consultation team was able to first start to test out some of our marketing attributes one of the one big ones being really going after that higher value customers. So as we talked about the value chain, we know that we have a lot of our customers are in the low income kit cohort. We were looking to get more customers in that moderate cohort that really showed higher lifetime value and the propensity to spend on all of the services and value the services that we offer, not just looking for a price point.

And so through our partnership with the 2 parties and then also working with our Google and Meta and things like that. We were able to find some local like customers that we can now market to through digital marketing and be a little bit more targeted. It's not a perfect science, but we can wait towards more of those -- the customers that we want to see our ads. That's that marketing initiative was scaled in our Q2. And then by the end of our Q3 here, we're over 900 stores, and we seen really good results. And we don't need to see in all 1,100 of our stores because they are certainly areas where it makes sense to not make the investment. But I'd say we're pretty much scaled at that number of stores. And we've seen really good returns in terms of return on advertising spend and also margin return on investment and that means we're delivering more margin dollars than the advertising spend that we're making.

So that's the first, I would say, big thing that is driving our business. And a lot of that spend is geared towards the tire category. And I think you can see the performance in our tires while it has been pressured like the rest of the industry, we continue to believe we're taking share in the tire category, particularly Tier 1 through 3.

But if you optimize the partners you're dealing with, the way you're deploying your dollars, it can drive a much better return than how the allocation of those marketing dollars have been previously...

That's correct. That's correct. And it's been incremental spend as well. So what we did in Q1 and Q2 was really a rearrangement of the spend away from some channels into digital acquisition marketing. And when we proved it out, we then ramped up the spending on the digital marketing.

In our Q3, we spent $6 million more in marketing -- acquisition marketing than we did in the prior year. That was largely funded by a $7 million reduction in G&A related to our store closures. So we're taking the benefits of the store closures, reinvesting it back in the marketing program for our go-forward stores. There's still more optimization to do. We're going to start spending on different categories like oil in a more meaningful way and also trying out different channels than just pay per click. We've started a little bit of streaming but there are other opportunities for us as we look at the digital channel.

So that's the marketing benefits more to come on that, and we'll be -- like I said, we didn't get to a full run rate on the marketing spend until the end of December. So we expect to continue another good investment in our fourth quarter marketing spend. The next piece would be the merchandising. Another leader that we brought in, Katie Chang. Katie came to us, she was -- she worked. I knew her from a previous life. She worked for 1 of our big tire distributors and also had experience at Lowe's working in strategy and in category. So really good balance of industry contacts, industry experience, well respected in the industry that we operate in, but broad-based retail experience as well.

And with Katie, we've gone on another two-pronged path, the first being pricing. So with help from the Alix Partners team, we've launched a machine learning tool. It's really taking multiple elements from that can affect where the price should be of a tire, whether it's competitive set, whether it's placing the screen price relative to the step above or below it.

The promotions that it has available to it, either company funded or vendor and the ultimate elasticity of that skew that brand to know how sensitive the consumer is to a price change. And we've optimized our pricing using that tool, again, testing it in Q1, rollout in Q2, will roll out in Q3. The result of it is that we've taken price up in some SKUs down in other SKUs. But on balance, we're finding that it's more supportive of tire volume, entire profitability. We're expanding that into other categories. But started with tires, clearly, our most important category in terms of being sharp on price.

On top of that, has been the transformation of the screen from one that was maybe a little bit water down, too many selections at each tier to one that's much more focused. And I think I talked about this just a little bit earlier, wanting to sell more out of our screen to drive better margin to drive easier in-store selling for our teammate and the guest.

They don't need and the guest doesn't want 1 million choices. They want -- they can only put 4 tires on their car. They can't put them all. So they really just need our recommendation and to know that whatever we recommend, we have in stock and we stand behind. And for us, we've done that through partnering with our most trusted and valued strategic partners. And then it's very similar on the parts side, concentrating a lot of our volume through fewer newer parts suppliers allows us to take advantage of the scale that Monro has grown to...

Contributing to the margin expansion.

Yes. Yes, exactly. That's why we expect, as we look forward into next year, while we didn't talk about guidance, but we expect it to be here.

Yes, we expect it to be where we can grow and we can expand margins and it's on the backs of these initiatives. And then the final piece, I would say, is just the store operations because obviously, can talk about all these other things, but if you don't deliver a good store experience, it's all for now. So we're driving more cars to our stores is the intent through our marketing. We have better assortment while they're there across all of our services. And now we just got to do a really good job.

So to do that, we've really leaned on the ConfiDrive courtesy expression is the backbone of that guest experience. The #1 thing that you can -- you want a guest to leave with is the feeling of trust. And the way you can kind of institutionalize trust is to create a tool and a process that builds that trust no matter who is working in the store that day. And ConfiDrive, we believe, helps us do that because it takes the recommendations and the update to the guests about their vehicle, a little bit out of the store managers' hands and standardizes the way we present that through standard measurement, a standard yellow green form measured against GAAP standards. And even more importantly, now as we move into this year, we're really leveraging photos, over maybe a year ago, you would say 1 or 2 photos per ConfiDrive was the average. We're now at around 6 photos per ConfiDrive.

And just to clarify, this is a tablet-based technology that will take pictures of the underbelly of the car where you can directly point to the car -- the vehicle owner to say, listen, you're going to eventually have to address this. Your tires should be this thickness. There's this sickness your shock is on the verge of X.

That's correct. Just for background, Monro has always had a paper-based courtesy inspection form. It used to be really, I'll call it, ugly, we updated it to be the red yellow green map standard, but it was still paper-based. Just like a paper-based schedule, as I mentioned earlier, from a corporate standpoint, from a field management standpoint, you don't really know if the store is doing it, unless you get into the store and flip through every invoice and make sure that there's a courtesy inspection completed attached to the invoice.

You could do...

Which now it's all structured data because -- and that's the biggest managerial change is your ability to hold people accountable to the structured data that comes out of the system because it's now electronic, not to mention the trust and the benefit that it provides with the guest by actually now having pictures and true measurements attached to this form.

Two questions in this regard. How -- what is the internal thinking on being able to use artificial intelligence with this seemingly very congruent process where AI could be deployed just to give you a little bit of perspective. We had a session during lunch where we had an artificial intelligence expert, came in and did some demonstrations coincidentally, one of the demonstrations was he typed into chat GPT or one of the LLM go find the new tires for my Tesla and it went through tire rack and went through all these different places where he was able to look. And then the question is, how are you able to deploy technology for doing some of the processes you have and to tap into some of this changing way that consumers are seeking the services that you offer to be best positioned to capitalize on that.

Yes. It's a great question. We obviously have an AI road map that we're working through with our partners. I would say some early places where we see generative AI being deployed in our business, some no-brainer kind of places, first of all, we have a call center, where currently, we have a bunch of agents who are Tier 1. They take that call. We originally -- the call would always go to the store. And we launched the call center a couple of years ago and now have all of our stores on the call center to the point where most of the calls are going to the call center, not the store. The call center is then better equipped to handle that call. They don't have a guest in front of them, they're not running around through the bays. They can handle that store in a professional way, make sure we get their appointment scheduled for them at a time that they need, have visibility to other stores and then also send the call back to the store if they need expertise from the store manager.

That Tier 1 can -- we're moving towards basically a completely AI bot experience, AI agent experience. What will that allow us to do is invest in a Tier 2 call center. That's where our the people will be, and they will then be able to handle the questions that used to go to the store for clarification. Now we'll have a team of experts that can handle that next level moving the cost to higher value-add activities and further allowing the stores to truly be about walk-ins and the guest in front of you versus having to deal with the guest to online.

That now moves over to the same experience within our website, obviously, in our appointment scheduling to move into kind of that virtual artificial intelligence-based scheduling program and scheduling system versus the more point and click that we currently have. So that's the first wave. The second place that we're starting to use it is just through the reporting that we provide our field teammates. So we have dashboards that allow our field teammates to assess the health of their business. We've since rolled something I'll call the DM toolkit, which connects the daily scorecard that shows you all your output metrics with KPIs, which are all the input metrics that affect the output metrics and in between, we're leveraging artificial intelligence to come up with the recommendations that say this metric is being moved because this metric is moving over here to improve this metric based on what we see. These are the 3 actions that should be taken in the store.

Then from there, we develop a formalized action plan at both the store manager and the district manager sign off on. And now that's the accountability that we hold the store to make improvements. And then, of course, on the customer side, it might be a little bit further of a journey in terms of our artificial intelligence on the customer side other than the call center. But we are exploring ways where we can improve the guest experience through artificial intelligence, including things as simple as helping them to diagnose their own problems on the website so that they can better understand maybe what is happening to their vehicle before they decide to begin the shopping process.

So if we were to bring this all together, we established that the auto services industry still very fragmented. I mean you probably still have a lot of small mom-and-pop players who are not able to do some of these things. And there's still meaningful market share. Monro has improved and optimized its asset base by closing stores and ensuring that the stores are properly supported. It's improved its merchandising, store operations.

Now if you take all of that, and layer in what seems like some interesting artificial intelligence tools, does it enable Monro to achieve some of its goals and success faster than it would have otherwise. And we probably couldn't have had this question a year ago given some of the -- not only progress that Monro made, but how fast this technology has developed. So are you more excited about the future given what's already taken place and what you know?

Absolutely. And I would say that a good example of it already, and I didn't even talk about it because we talked about it earlier, is the machine learning on the pricing tool, right? There's also back office behind the scenes. We're looking at demand planning through artificial intelligence as well and our sourcing strategy for mins and maxes in the stores to optimize inventory.

So I think a lot of these work streams that we have are going to be technology AI-enabled where, to your point, a few years ago, last year, we wouldn't even consider that. I think the initial reaction I would have, though, is we're doing the -- we've done a lot of the foundational work already maybe to bring the conversation full circle that has been underappreciated, I think, nobody loves a good-looking basement.

But I mean, maybe you do, but maybe not the senior black we built that foundation, but I think what we're building is the house on top of it at this point. And we think that there's a lot of, I think, value that will be unlocked for a lot of the work that we've already done and that these other opportunities that we have ahead of us will be accelerators.

We cannot wait to see how this all plays out. Please join me in thanking both Brian as well as Felix from Monro on a great session.

Thank you.

Good morning, ladies and gentlemen, and welcome to Monro, Inc.'s Earnings Conference Call for the Third Quarter of Fiscal 2026. [Operator Instructions] And as a reminder, this conference call is being recorded and may not be reproduced in whole or in part without permission from the company.

I would now like to introduce Felix Veksler, Vice President of Investor Relations at Monro. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we will be referencing a presentation that is available on the Investors section of our website at corporate.monro.com/investors.

If I could draw your attention to the safe harbor statement on Slide 2, I'd like to remind participants that our presentation includes some forward-looking statements about Monro's future performance. Actual results may differ materially from those suggested by our comments today. The most significant factors that could affect future results are outlined in Monro's filings with the SEC and in our earnings release.

The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, on today's call, management's statements include a discussion of certain non-GAAP financial measures, which are intended to supplement and not be substitutes for comparable GAAP measures. Reconciliations of such supplemental information to the comparable GAAP measures are included as part of today's presentation and in our earnings release.

With that, I'd like to turn the call over to Monro's President and Chief Executive Officer, Peter Fitzsimmons.

Thank you, Felix, and thanks to everyone for joining us. Great to be with you today. This morning, I'd like to update you on our progress and the momentum we've continued to build at Monroe during our fiscal third quarter. As we have done before, I will focus on the 4 key areas identified as opportunities for performance improvement, which are shown on Slide 3 of our presentation materials.

As a reminder, these are driving profitable customer acquisition and activation, improving our store-based customer experience and selling effectiveness, increasing merchandising productivity, which includes mitigating tariff risk and real estate dispositions related to the previous closure of 145 underperforming stores. After that, I'll briefly touch upon our fiscal third quarter results which represent another step forward as we continue to implement our performance improvement plan to enhance Monro's operations, drive profitability and increase total shareholder returns. Let's start with driving customer acquisition and activation.

During the third quarter, we continued to advance our acquisition marketing efforts through the expansion of a multichannel digital media plan to target high-value potential audiences. We expanded marketing to more than 340 additional store locations in the third quarter while maintaining a disciplined phased rollout to ensure appropriate returns. We also completed an operational readiness assessment to determine which stores were best positioned to receive marketing support.

As part of these efforts, we implemented a measurement framework that provides visibility into marketing's impact on key performance indicators, including calls, sales and gross profit dollars. We also continue to activate Monro's customer relationship marketing or CRM database to attract existing customers to revisit our stores through specific offers for additional services that would improve the overall safety of their vehicles. And as a third component of our marketing efforts, we have added call center support to 114 additional store locations.

We now have more than 830 stores benefiting from our customer call center, and we expect to add the remainder of our stores in the near future. Now let's discuss the things we are doing to improve the customer experience and selling effectiveness in our stores. As we've previously communicated, during the third quarter, we continued to work toward expanding the usage of our ConfiDrive inspection tool on every customer vehicle visiting our stores.

We work closely with all of our technicians to ensure the accuracy and full completion of every inspection every time. This has allowed our store managers to provide our customers with a window into the overall condition of their vehicle, both from the standpoint of what is operating well and what things might need some attention. Our goal is to provide transparency and ensure that we hand back the keys to a safer vehicle when we return it to the customer. Last quarter, we indicated that we had completed a field realignment to rightsize and streamline our field management following the closure of 145 underperforming stores.

While this resulted in an overall reduction of district managers, it has also resulted in an overall increase in the quality of district managers across the chain. Our streamlined and agile field organization enables us to communicate faster within our field network, which has improved our ability to serve guests more quickly and more effectively. Further, we've created and now implemented useful analytical tools such as the District Manager Toolkit as well as a labor force optimization capability that enables our field leaders to better develop our store-based teammates. Finally, we've made an investment in a team of field compliance support specialists whose work enables us to reduce the volume of certain administrative tasks previously handled by our district managers.

This allows our field leadership to focus more of their time on training and coaching our store teams. Now let's turn to merchandising, including mitigating tariff risk. In the third quarter, we continued to build out our foundational vendor and assortment strategy. In our tire category, we focused heavily on ensuring inventory availability to present a well-developed product assortment to our guests during the fall and early winter selling season. As the weather changed, we leveraged our strong supplier and distributor relationships to expand availability where needed to deliver the right products to our customers in each of our tire tiers.

As we approach mid-winter, we are refining our tire assortment for the next selling season with an emphasis on achieving our objective to narrow our overall tire assortment to better serve customer needs. At the same time, we also continue to modify our assortment and availability of stock parts so that we can continue to be well prepared to grow our service business. As it relates to tariffs, we continue to carefully manage their impact on our overall product acquisition cost and on our market pricing.

So far, and as communicated earlier, tariffs have not been as significant on either our customer pricing or our product cost as we anticipated when higher tariffs were first announced. Generally, we've been able to strike the right balance between costs and price adjustments, which has enabled us to maintain solid gross margins in an uncertain economic environment. We believe this positions us well moving forward. And finally, just to provide an update on closed store real estate dispositions.

Following the closure of 145 underperforming stores in the early part of this fiscal year, we initiated a process to exit the real estate at these locations, which included 40 stores that we own. During the third quarter, we exited 32 leases and sold 20 owned locations, which resulted in proceeds of $17.3 million. This brings us to a total of 57 leases exited and 25 locations sold, resulting in cumulative proceeds of $22.8 million fiscal year-to-date. As a reminder, this process is expected to generate positive cash flow and be largely completed during the next few quarters. Importantly, and as discussed previously, this enables us to focus on improving performance in our continuing locations in the fourth quarter of fiscal 2026.

Now let me briefly touch on several key highlights of our fiscal third quarter results, which Brian will cover in more specific detail in just a few moments. Turning to Slide 4 of our presentation materials. After we saw some softness in consumer demand in October, the Monroe team drove growth in comparable store sales in November and December. Further, when adjusting for a shift in the timing of the Christmas holiday in the prior year, the months of November and December as well as the third quarter marked the first time we delivered positive comps on a 2-year stack in over 2 years. This has also enabled us to report our fourth consecutive quarter of positive comps for the first time in several years.

We believe we were able to take share in our tire category as soon as winter hit as our stores were well prepared with proper staffing, an updated tire assortment and additional marketing spend. In addition, for the second quarter in a row, we delivered solid gross margin performance. this time with a gross margin rate that expanded 60 basis points year-over-year to 34.9%. We also reinvested the selling, general and administrative expense savings from our closed stores into additional marketing to support top line growth. Lastly, for the third quarter in a row, we reduced inventory levels across the system this time by over $7 million.

We've now achieved an overall inventory reduction of more than $28 million, which is 16% since the end of March, just 9 months ago. This is a clear indication of how we've continued to manage our inventories more efficiently in fiscal 2026. Our sales momentum has continued into fiscal January with preliminary comp store sales up almost 1%. Looking forward and coupled with our increased marketing spend, we believe higher expected consumer tax refunds should provide a tailwind to top line trends for the remainder of fiscal 2026. We continue to expect to deliver positive comp store sales for the full fiscal year.

To summarize, we are pleased with the progress we've made implementing our 4 key areas of focus, which is allowing us to build momentum in our business. Two of the key areas of focus for fiscal 2026 are largely complete with the successful closing of 145 underperforming stores and associated real estate monetization as well as the strengthening of our merchandising team. Optimizing our marketing investment and improving our store performance will remain important activities for the remainder of fiscal 2026.

Our fiscal third quarter results serve as another positive step toward accelerating the pace of the company's performance improvement as well as better capitalizing on positive industry trends to unlock Monro's full potential. Before I hand the call over to Brian, I want to thank our more than 6,000 valued Monro teammates in our 1,115 stores for their hard work every day and night serving our customers. I also want to recognize and thank our leadership team. During the last 9 months, we have meaningfully added or promoted talented colleagues in nearly every critical area, among them, merchandising, marketing, stores and finance. We are well positioned to continue our positive momentum.

And with that, I'll now turn it over to Brian, who will provide an overview of Monro's third quarter performance, strong financial position and additional color regarding the remainder of fiscal 2026. Brian?

Thank you, Peter, and good morning, everyone. Turning to Slide 5. Sales decreased 4% to $293.4 million in the third quarter. This was primarily driven by a reduction in sales from the closure of 145 underperforming stores in the first quarter of fiscal 2026, partially offset by a 1.2% increase in comparable store sales from continuing store locations. For reference, comps were down 2% in October, up 4% in November, and we exited the quarter up 1% in December.

Our tire category was up 5%. And while tire units were down 1%, we believe we outperformed the industry in the quarter. Gross margin increased 60 basis points compared to the prior year. This primarily resulted from lower material costs and lower occupancy costs as a percentage of sales, which were partially offset by higher technician labor costs as a percentage of sales, mostly due to wage inflation. Total operating expenses were $83.8 million or 28.6% of sales as compared to $94.8 million or 31% of sales in the prior year period. The decrease was primarily driven by $14 million of net gains from closed store real estate dispositions and $7.3 million of lower costs from the closure of 145 underperforming stores in the first quarter of fiscal 2026.

This was partially offset by $6.2 million of increased marketing costs to support top line growth and $4.7 million of costs incurred in connection with consultants related to our operational improvement plan. Operating income for the third quarter was $18.6 million or 6.3% of sales. This is compared to operating income of $10 million or 3.3% of sales in the prior year period. Adjusted operating income, a non-GAAP measure, for the third quarter was $10.3 million or 3.5% of sales as compared to $11.7 million or 3.8% of sales in the prior year period. Net interest expense decreased to $4 million as compared to $4.2 million in the same period last year.

This was principally due to a decrease in weighted average debt. Income tax expense was $3.4 million or an effective tax rate of 23.6%, which is compared to income tax expense of $1.2 million or an effective tax rate of 21.2% in the prior year period. The year-over-year difference in effective tax rate is primarily related to the impact of an income tax benefit in the prior year period from the settlement of certain state income tax returns and the impact from other discrete tax adjustments, none of which are individually significant. Net income was $11.1 million as compared to net income of $4.6 million in the same period last year.

Diluted earnings per share was $0.35. This is compared to diluted earnings per share of $0.15 for the same period last year. Adjusted diluted earnings per share, a non-GAAP measure, was $0.16. This is compared to adjusted diluted earnings per share of $0.19 in the third quarter of fiscal 2025. Please refer to our reconciliation of adjusted operating income, adjusted net income and adjusted diluted EPS in this morning's earnings press release and on Slides 9, 10 and 11 in the appendix to our earnings presentation for further details regarding excluded items in the third quarter of both fiscal years.

As highlighted on Slide 6, our financial position is strong. We generated $48 million of cash from operations during the first 9 months of fiscal 2026. Our AP to inventory ratio was 196% at the end of the third quarter versus 177% at the end of fiscal 2025. We received $25 million from the disposal of property and equipment, primarily related to the successful disposition of real estate associated with the underperforming stores that we closed in the first quarter, and we received $3 million in divestiture proceeds. We invested $22 million in capital expenditures, spent $28 million in principal payments for financing leases and distributed $26 million in dividends.

At the end of the third quarter, we had net bank debt of $40 million, availability under our credit facility of approximately $425 million and cash and equivalents of approximately $5 million. Now turning to our expectations for the full year of fiscal 2026 on Slide 7. We continue to expect to deliver year-over-year comparable store sales growth in fiscal 2026, primarily driven by our improvement plan as well as tariff-related price adjustments to our customers. We continue to expect that the results of our store optimization plan will reduce total sales by approximately $45 million in fiscal 2026.

Given baseline cost inflation as well as tariff-related cost increases, we expect that our gross margin for the full year of fiscal 2026 will be consistent with fiscal 2025. We continue to expect to partially offset some of this baseline cost inflation as well as some of the tariff-related cost increases with benefits from our store closures and operational improvements from our improvement plan. We expect to reinvest the selling, general and administrative expense savings from our closed stores into additional marketing to support top line growth at our continuing stores. We continue to expect to generate sufficient cash flow that will allow us to maintain a strong financial position and to fund all of our capital allocation priorities, including our dividend during fiscal 2026. Regarding our capital expenditures, we continue to expect to spend $25 million to $35 million.

And with that, I will now turn the call back over to Peter for some closing remarks.

Thanks, Brian. As previously indicated, through our national retail network, economies of scale and durable business model, we believe we can provide our customers with the services they need and generate meaningful value for our shareholders in any economic environment. Our balance sheet is strong, and our business generates healthy cash flow. We remain encouraged by the progress we've made and are keenly focused on executing our plan to improve operations, drive profitability and enhance total shareholder returns.

With that, I will now turn it over to the operator for questions.

[Operator Instructions] Our first question comes from Thomas Wendler from Stephens.

Congratulations on the great quarter. Happy to see another quarter of positive comps here. I wanted to dig in on the digital marketing efforts. Can you maybe help us gauge the impact it had on the same-store sales this quarter?

Tom, sure. As you will remember, we have steadily increased the amount of digital marketing we provide to our store network, and we significantly increased it in the third quarter, month by month. And as you will also remember, every time we've done that, the stores that get additional support perform better than they did before and the rest of the network on calls, comp store sales and gross margin dollars. That has absolutely continued. I also want to call out that it's not just digital marketing. We also use our CRM and our call center to support our stores. And so I think the collective impact of our marketing efforts are going to continue to drive incremental comp store sales.

Perfect. And maybe just one more follow-up there on that. How should we be thinking about the rollout of the digital marketing to the remainder of the stores? I think you mentioned the operational readiness of the location plays into the rollout. What are you seeing for operational readiness of the remaining stores?

So one of the benefits of the way we've approached this is we're pretty disciplined about looking at return on investment. We're going to continue to invest significantly in marketing and which stores, which regions, when, how much dollars we invest will vary based on what we think we're getting from all of that investment.

There are some stores that haven't yet received digital marketing support, and I wouldn't read anything into that other than they might be understaffed. They might have other issues that would make us think we should wait before we provide support there. In some cases, we might decide that they're going to benefit more from CRM than from digital marketing. So again, I would say it's the collective impact of marketing that's the most important thing. And all of the stores will get some support.

Our next question comes from David Lantz from Wells Fargo.

Congratulations on the nice quarter. So I was just curious if you could talk about the puts and takes in gross margin in a little bit more detail for Q3 across distribution and occupancy, material costs and technician labor as well as what the expectations are for Q4?

Absolutely, David. So we were 60 basis points better than the prior year in our gross margin, as we said, at 34.9%. That was benefited by lower material costs of 80 basis points, primarily driven by better price and mix in both our service and tire categories, offset by a little bit of a headwind related to a higher tire mix in the quarter. We also saw 30 basis points of benefit from our occupancy costs as a percentage of sales, largely related to higher comparable store sales as well as the benefit from our store closures.

Those were both partially offset by 50 basis points of technician labor costs going up as a percentage of sales, primarily due to wage inflation, but noting that that's a better run rate number than where we are from a year-to-date standpoint. So seeing improvement in Q4 relative to Q3 through -- relative to the first 6 months of the year. As it relates to our fiscal fourth quarter, we said in our prepared remarks that we expect our full year gross margin to be consistent with the prior year. Through 9 months, we're about 20 basis points behind, largely driven by the tough Q1 compare that we had earlier in the year. But what that means is we expect to have gross margins above prior year in Q4 in order to achieve that consistency on a full year basis.

Got it. That's helpful. And I recognize we're only a couple of days after Winter Storm Fern, but curious if you can help us frame what you think the potential benefits from that for your store base and comps could be over the next couple of months?

Sure. First of all, as the threat of the storm unfolded towards the end of last week, we definitely were able to meet consumer demand in all of the stores across our network, which is terrific. We were ready for that. Second, I think everybody in the world or at least the North American world has been impacted by the storm. And so we have got all of our stores back online by now and expect that over the next couple of weeks, we're going to see some nice incremental sales resulting from people recognizing that they really do need to do something to keep their vehicles safe. So really good positive impact from the developing storm, and we're in pretty good shape going forward.

Our next question comes from Bret Jordan from Jefferies.

Could you talk about the comp ticket versus traffic contribution?

Yes. Our traffic was down mid-single digits in the quarter, offset by mid-single-digit repair order increase, so average ticket increase, netting out to the up 1.2% total comp.

Okay. Any regional dispersion?

We saw strength in the Northeast and consistent performance in the Mid-Atlantic and South. If there was any weakness, it was in the West.

Okay. And then I guess when you think about the 15 locations left to be sold, are the values probably roughly similar to what you've already sold? I think about the cash contribution for those coming forward.

Well, not all of the stores that are left are owned stores. There's a good amount of leases as well. But for the owned stores that we have remaining to be sold, we have them recorded on our balance sheet as a separate line called assets held for sale. It's approximately $5 million, a little less than $5 million. And that's kind of the minimum value we expect to achieve. So something there or higher related to our own stores.

Our next question comes from Brian Nagel from Oppenheimer.

So I want to ask maybe a little bit longer-term question. You're seeing the -- you've had a number of initiatives now that are taking hold, and I think we're starting to see those results -- the effects of those efforts show up in the results. I guess -- and I've asked this question before, but I'll ask it again. If you look at the model now, what are we playing for?

And I guess, obviously, there's a lot of transitory factors that can impact your sales such as weather, you talked about the tax refunds, et cetera. But as you're watching these initiatives take hold, I mean, how should we be thinking about what comp store sales your change should be? And then with that, at what point do we get expense leverage as a result of these improving sales?

Sure. So I think from experience, the impact of marketing and the store improvement efforts takes quarters to really fully reveal itself. I do think that we have stayed focused on the things that we think are most impactful, and we've seen good results. I think that our expectation is that as the quarters pass, fourth quarter, first quarter next year and so on, we'll see a lift in comp store sales. and we'll see solid gross margin. And the combination of those 2 things, together with managing our operating expenses well should drive incremental profit.

There will be ups and downs. And if -- when I look at the period that just passed, if you look at November through January, we had a really good early winter with good tire sales, good service. There are many things that are clicking that over the longer term will impact continued growth in comp store sales. So I do think we're going to get some operating leverage benefits. But there are those other factors that we have to remember, which is we've got wage pressure in the stores.

And to be honest, we have some other initiatives that we want to put into place that may require some additional investment. But the key will be increasing the comp store sales and having a very good solid gross margin rate aligned with where we are and the product of good vendor relationships, good marketing support for our vendors and other things that we're doing as a good partner with both our consumers and our suppliers.

That's very helpful. And then I want to go back. I think someone kind of asked this question before and I ask it maybe differently. As you look at these potential benefits here in the near term, the weather with the storm and potentially other storms coming here. And then a lot of people are talking about this higher -- what's expected to be higher tax refunds in '26. How do you think about the duration of those benefits? Are we going to see the majority here in the fiscal Q4? Or is there a longer tail on these type of drivers?

So I think a challenging winter, which we're in the middle of right now is good for us. Of course, there's going to be disruption as there was with the severity of the storm that just ended. But as long as we can work our way through the disruptions, it creates consumer need and immediacy. So I really like the fact that the winter right now seems to be a difficult one and the fact that consumers may have a little bit more money in their pockets. If you think back to COVID, when the government distributed quite a bit of cash to consumers, they spent it, and they spent it on things that they needed to spend it on.

We know that there is a need to continue to keep your vehicle safe. And so the combination of the tax refunds and the likely tough February, let's call it that, are pretty important to short-term growth. Now in the longer term, as we move our way into the spring selling season, we do sell a lot of tires in the early spring. And if you think about the things we put into place, which includes ConfiDrive, in January alone, we drove some incremental service revenue, which is all the result of the inspection tool. And as that continues to mature month by month by month, that will also drive incremental high-margin revenue because service is a higher margin than tires.

[Operator Instructions]

We currently have no further questions. And I would like to hand back to CEO, Peter Fitzsimmons for any closing remarks.

Well, thank you again, everyone, for joining us today. We're pleased with the progress Monro has made this fiscal year, and we're optimistic about the opportunities in front of us. I believe the company is now well positioned to capitalize on the additions to the team and the operating improvements we put in place during fiscal 2026. Together with positive industry trends, we're well positioned for growth. I look forward to keeping you updated on our progress in the quarters to come. Have a great day. Thank you.

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

Good morning, ladies and gentlemen, and welcome to the Monro Inc.'s Earnings Conference Call for the Second Quarter of Fiscal 2026. [Operator Instructions].

And as a reminder, this conference call is being recorded and may not be reproduced in whole or in part without permission from the company. I would now like to introduce Felix Veksler, Vice President of Investor Relations at Monro. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us on this morning's call. Before we get started, please note that as part of this call, we will be referencing a presentation that is available on the Investors section of our website at corporate.monro.com/investors. If I could draw your attention to the safe harbor statement on Slide 2, I'd like to remind participants that our presentation includes some forward-looking statements about Monro's future performance. Actual results may differ materially from those suggested by our comments today.

The most significant factors that could affect future results are outlined in Monro's filings with the SEC and in our earnings release. The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Additionally, on today's call, management's statements include a discussion of certain non-GAAP financial measures, which are intended to supplement and not be substitutes for comparable GAAP measures. Reconciliations of such supplemental information to the comparable GAAP measures are included as part of today's presentation and in our earnings release. With that, I'd like to turn the call over to Monro's President and Chief Executive Officer, Peter Fitzsimmons.

Thank you, Felix, and thanks to everyone for joining us. Great to be here with you today. This morning, I'd like to update you on the continued progress we are making at Monro. As we have on our prior quarterly calls, I will focus on the 4 key areas identified as opportunities for performance improvement, which are shown on Slide 3 of our presentation materials. These include driving profitable customer acquisition and activation, improving our store-based customer experience and selling effectiveness, increasing merchandising productivity, which includes mitigating tariff risk and continuing to work on real estate disposition related to the previous closure of 145 underperforming stores.

After that, I'll briefly touch upon our fiscal second quarter results, which serve as a solid foundation to build upon as we continue to implement our performance improvement plan to enhance Monro's operations, drive profitability and increase adjusted operating income and total shareholder returns. Let's start with driving customer acquisition and activation. As previously discussed during our last 2 earnings calls, we've identified Monro's highest value customers. As a reminder, these customers deliver significantly more profit per customer than the lowest tier of customers. They are repeat purchasers that visit us over a number of years, and they choose us because we provide both the tires they want and the auto aftermarket services that meet their vehicle needs.

During the second quarter, we continued to advance our acquisition marketing efforts through the deployment of a wide range of digital marketing tools to reach our target audience. We have increasingly activated our customer relationship management marketing to speak to our existing customers. Integrated into our marketing activities is the completion of a customer segmentation analysis that is helping to augment our marketing efforts with further granularity on higher-value existing customers and potential customers.

Those who are expected to generate significantly more revenue and gross margin dollars than the average Monro guest. We have now ramped our refined targeting to almost 600 stores, and we are encouraged to see that these stores are outperforming the balance of our store chain on several key metrics such as call volumes, store traffic, sales and gross profit dollar generation. And while we won't necessarily expand our marketing efforts to all stores, we do plan to ramp up and scale these efforts by the end of December.

In early September, we were pleased to strengthen our marketing team with the hiring of a new leader, Tim Ferrell, as our Vice President of Marketing. Tim has extensive experience driving growth for multi-location businesses, including Valvoline and Sun Auto Tire & Service, with a focus on media strategy and targeting, brand positioning and messaging, digital marketing, lead generation and conversion rate optimization. In 2 months, Tim has made meaningful enhancements to our marketing strategy and execution.

Now let's discuss the things we are doing to improve the customer experience and selling effectiveness in the stores. During the second quarter, we further emphasized our digital courtesy inspection tool, ConfiDrive, to more effectively present pictures of needed vehicle maintenance and repairs to our guests during their visit to the stores. As part of improving our store operations, we've also built a periodic review process of key data coming out of ConfiDrive at the local level. As a reminder, we have a centralized call center that our customers call to schedule an appointment with us.

This allows our store managers to focus more of their time on in-store activities without having the burden of answering each and every call that comes in. In the more than 700 stores where our customer call center has already been implemented, we are encouraged to see that these stores are outperforming the balance of our store chain on key metrics such as sales and gross profit dollar generation. We plan to expand the rollout of our customer call center to all of our stores by early November.

During the quarter, we also completed a field realignment to rightsize and streamline our field management following the closure of the 145 underperforming stores. While this resulted in an overall reduction of district managers, it has also resulted in an overall increase in the quality of district managers across our chain. Finally, and importantly, we've also introduced a new district manager toolkit, which we believe will allow our district managers to better understand the input metrics and levers that drive store-level sales, attachments and gross margins.

Now let's turn to merchandising, including mitigating tariff risk. We continue to work closely with our tire vendors to align on go-forward assortment opportunities to drive incremental sales for both parties, and we are now in the process of developing an updated tire assortment strategy that will resonate with our guests and position both Monro and our strategic supplier partners for growth. We are encouraged by the level of vendor support we are receiving on all tire tiers as well as with the enthusiasm of our suppliers to work with us.

One area in which we have received additional support from vendors is with our fall promotions, which have helped us accelerate the sellout of tire inventory. We are also implementing new analytical tools for demand and inventory forecasting as well as for pricing. These tools will enable us to run a more dynamic sales and operations planning process and ensure our price positioning is appropriately competitive while maximizing margins. As a complement to these tools, during the second quarter, we augmented the capabilities of our existing merchandising team with the addition of 2 new colleagues who are helping to lead tire acquisition and product and service pricing.

We continue to carefully manage the impact of tariffs on our overall product acquisition cost and on our market pricing. We are also actively monitoring the impact of tariffs and other market conditions on actual and potential changes in tire mix as well as potential customer vehicle maintenance deferrals. Generally, we have been able to balance cost and price adjustments to enable us to maintain solid margins.

And finally, just to provide an update on closed store real estate disposition. After having successfully completed the closure of 145 underperforming stores and repositioning our inventory in the first quarter, we started a process to exit the real estate at these locations, which includes 40 stores that we own. During the second quarter, we exited 21 leases and sold 3 owned locations, which resulted in proceeds of $5.5 million.

As a reminder, this process is expected to generate positive cash flow and be largely completed during the next few quarters. Importantly, and as discussed previously, this enables us to focus on improving performance in our continuing locations for the remainder of fiscal 2026. Now let me briefly touch upon several key highlights of our fiscal second quarter results, which Brian will cover in more specific detail in just a few moments.

Turning to Slide 4 of our presentation materials. The Monro team drove comparable store sales growth again in the quarter, which has enabled us to report 3 consecutive quarters of positive comps for the first time in a couple of years. Further, our business generated $0.21 of adjusted diluted earnings per share, which exceeded $0.17 of adjusted diluted EPS in the prior year second quarter. We achieved this through solid gross margin performance with a gross margin rate that expanded 40 basis points to 35.7% and prudent operating cost control as reflected in lower store direct costs and good corporate expense control.

Further, for the second quarter in a row, we reduced inventory levels across the system this time by approximately $11 million, which reflects improved inventory management. And while we have seen some recent softness in consumer demand, which is reflected in preliminary October comps that are down 2%, we expect to deliver positive comp store sales in fiscal 2026 and we have a variety of levers to pull that we believe will enable us to achieve meaningfully higher year-over-year adjusted operating income.

To summarize, we continue to be pleased with the progress we've made implementing our 4 key areas of focus, which we believe will allow us to accelerate the pace of the company's performance improvement as well as better capitalize on positive industry trends to unlock Monro's full potential. Our fiscal second quarter results serve as an indication of continued progress toward building enhanced profitability in fiscal 2026.

Before I hand the call over to Brian, I would like again to thank our teammates for their dedication to achieving our business goals as well as their commitment to serving our customers. And with that, I'll now turn it over to Brian, who will provide an overview of Monro's second quarter performance, strong financial position and additional color regarding the remainder of fiscal 2026. Brian?

Thank you, Peter, and good morning, everyone. Turning to Slide 5. Sales decreased 4.1% to $288.9 million in the second quarter. This was primarily driven by a reduction in sales from the closure of 145 underperforming stores in the first quarter of fiscal 2026, partially offset by a 1.1% increase in comparable store sales from continuing store locations. For reference, comp sales were up 2% in July, up 3% in August, and we exited the quarter down 2% in September. And while tire units were down mid-single digits, we believe we outperformed the industry in the quarter. Gross margin increased 40 basis points compared to the prior year. This primarily resulted from lower occupancy costs and lower material costs as a percentage of sales.

These were partially offset by higher technician labor costs as a percentage of sales, mostly due to wage inflation. Total operating expenses were $90.4 million or 31.3% of sales as compared to $93.2 million or 30.9% of sales in the prior year period. Importantly, the increase as a percentage of sales was affected by $8.3 million of costs incurred in connection with consultants related to our operational improvement plan, partially offset by $7.6 million of net gains from closed store real estate dispositions. The second quarter of the prior year also included $2.8 million of net gain on the sale of our corporate headquarters.

Operating income for the second quarter was $12.8 million or 4.4% of sales. This is compared to operating income of $13.2 million or 4.4% of sales in the prior year period. Adjusted operating income, a non-GAAP measure, for the second quarter was $14 million or 4.8% of sales as compared to $12.6 million or 4.2% of sales in the prior year period. Net interest expense decreased to $4.4 million as compared to $5.1 million in the same period last year.

This was principally due to a decrease in weighted average debt. Income tax expense was $2.8 million or an effective tax rate of 32.9%, which is compared to income tax expense of [ $2.5 ] million or an effective tax rate of 30.9% in the prior year period. The year-over-year difference in effective tax rate is primarily related to the discrete tax impact related to share-based awards and other adjustments, none of which are significant. Net income was $5.7 million as compared to net income of $5.6 million in the same period last year. Diluted earnings per share was $0.18. This is compared to diluted earnings per share of $0.18 for the same period last year. Adjusted diluted earnings per share, a non-GAAP measure, was $0.21. This is compared to adjusted diluted earnings per share of $0.17 in the second quarter of fiscal 2025.

Please refer to our reconciliation of adjusted operating income, adjusted net income and adjusted diluted EPS in this morning's earnings press release and on Slides 9, 10 and 11 in the appendix to our earnings presentation for further details regarding excluded items in the second quarter of both fiscal years. As highlighted on Slide 6, we continue to maintain a strong financial position. We generated $30 million of cash from operations during the first half of fiscal 2026. Our AP to inventory ratio was 186% at the end of the second quarter versus 177% at the end of fiscal 2025. We received $7 million from the disposal of property and equipment and $3 million in divestiture proceeds, invested $13 million in capital expenditures, spent $19 million in principal payments for financing leases and distributed $17 million in dividends. At the end of the second quarter, we had net bank debt of $50 million, availability under our credit facility of approximately $410 million and cash and equivalents of approximately $10 million.

Now turning to our expectations for the full year of fiscal 2026 on Slide 7. We continue to expect to deliver year-over-year comparable store sales growth in fiscal 2026, primarily driven by our improvement plan as well as any tariff-related price adjustments to our customers. We continue to expect that the results of our store optimization plan will reduce total sales by approximately $45 million in fiscal 2026. Given baseline cost inflation as well as our exposure to tariff-related cost increases, we expect that our gross margin for the full year of fiscal 2026 will be consistent with fiscal 2025.

We continue to expect to partially offset some of this baseline cost inflation as well as some of the tariff-related cost increases with benefits from our store closures and operational improvements from our improvement plan. We believe this will allow us to deliver a year-over-year improvement in our adjusted diluted earnings per share in fiscal 2026. We continue to expect to generate sufficient operating cash flow that will allow us to maintain a strong financial position and to fund all of our capital allocation priorities, including our dividend during fiscal 2026. Regarding our capital expenditures, we continue to expect to spend $25 million to $35 million. And with that, I will now turn the call back over to Peter for some closing remarks.

Thanks, Brian. As previously indicated, through our national retail network, economies of scale and durable business model, we believe we can both provide our customers with the services they need and generate meaningful value for our shareholders in any economic environment. We have a compelling set of consumer offerings and more than 6,000 talented teammates. Our balance sheet is strong, and our business generates healthy cash flow. We remain encouraged by the progress we've made, and we are keenly focused on executing our plan to improve operations, drive incremental profit and enhance total shareholder returns in fiscal 2026. With that, I will now turn it over to the operator for questions.

[Operator Instructions] Our first question comes from Bret Jordan from Jefferies.

Could you talk about within the comp, the price contribution versus car counts? And I guess, what are you expecting for price in the second half of the fiscal year, just given a lot of noise around tariffs?

Why doesn't Brian take the comp and then why don't I expand a little bit on our thoughts there?

Yes, Bret, in the quarter, we were down mid-single digits in traffic, up mid-single digits in ticket, netting out to the up 1% overall comp.

So just a couple of comments from me on the comps. Remember that in the second quarter, we were up 1.1%. So it's the third consecutive quarter of positive comps. And I think we did see some consumer demand softness in September and October. But I would say from experience in performance improvement assignments, working with aftermarket and retail companies, you usually expect some unevenness in comp store sales. And the things that we've been doing in the last 4 months to implement digital marketing in half our stores now, which ramped up steadily through the second quarter and still hasn't touched more than half of our stores makes us think that in the next couple of quarters, we're going to see some real benefits from our marketing efforts. And I would say same for the efforts in improving performance in the stores. So we remain pretty comfortable that we're going to see positive comps for the fiscal year.

Okay. And a question on working capital. Obviously, you benefit from the payables program, and there's been a lot of noise around that recently. Have you seen any changes as far as the risk spread that is being expected by the banks participating in your working capital program?

Nothing related to the risk spread. We did have a pricing adjustment back when we did our amendment to the credit facility for this period of time over the next 5 quarters. Our current spread is 225 basis points over SOFR. That's reflected in our supply chain finance facility, but no changes outside of that change.

Okay. So nothing recently with all the noise around a particular event?

No, not at all.

Our next question comes from Thomas Wendler from Stephens.

We saw some nice improvement in gross margins this quarter, expectations kind of flat gross margins year-over-year now. Just digging into the 50 bps improvement from material costs, can you maybe speak to the drivers there? What kind of wins are you seeing with vendors? How is this kind of being impacted by changing product assortment?

Yes. I will -- I'll take the overall gross margin question and let Peter answer any color that he wants to add on the vendor question. As you said, gross margins increased 40 basis points in the quarter. That was driven a 70 basis point improvement with higher comp sales and benefit from store closures that improved our occupancy costs as a percent of sales. Material cost was 50 basis points improvement as a percent of sales, and that is primarily due to better service category margins that we saw in the quarter. And then partially offsetting those was an 80 bps increase in tech pay as it relates to wage inflation year-over-year.

As we look out for the rest of the year regarding gross margin expectations, we expect gross margin for the full year, as you said, to be consistent with 2025. And importantly, this means that we expect higher gross margins in the second half of '26 compared to the prior year period. All of this is dependent on comp sales levels, of course, and our ability to continue to manage price adjustments with our cost increases, both for material and labor. And we continue to expect to see a benefit from our store closures in the second half as it affects gross margin.

And Tom, maybe a couple of comments on vendors. One of the great things about our particular business is we have 8 to 12 vendors that matter, and we have good relationships with all of them, tires and parts. The vendors are happy about the things that they've heard from us, and they really like the things that we're doing with our marketing program. So in the second quarter, together with the strengthening of our merchandising department with the joining of Katy Chang, we've gotten more marketing support from more vendors for the things that we're putting into place. So I think we're going to continue to feel pretty good about the marketing support we get from all of our vendors.

And then you mentioned some softness in the consumer you were seeing. Is there any kind of distinct consumer that's having some more troubles than others? Are you guys seeing any more trade down? Are you still drawing the line at Tier 3 tires?

I think that the lower income consumer is probably feeling a fair amount of pressure right now. I think it's reflected in what you read in the papers and see elsewhere. But I want to remind everybody that what we offer is a service that's nondiscretionary and that everybody needs. We have customers at all economic levels, and we have products for everyone that wants to shop at our stores. So I think that over time, the services that we're providing are going to enable us to capture good market share and comp store growth, as we've said before, in any economy.

Our next question comes from David Lantz from Wells Fargo.

I guess tire units declined mid-single digits in the quarter. So curious how you're thinking about the overall tire backdrop as we enter peak selling season here over the next couple of months.

Yes. I think as we're looking at tire units, we're encouraged by what we believe is relative outperformance to the industry. A lot of the dynamics that have been in place regarding tires are still in place, being a high-ticket category. It is an area of sensitivity for our consumers and customers' wallets. As we look forward, we believe, as Peter just said, that even in a tough backdrop, which we clearly think that we're in relative to the consumer, we're doing a lot of things that are going to move the needle for us in terms of units and overall tire sales, which is obviously 50% of our overall sales.

And that's really driven by the marketing, merchandising and in-store execution that Peter talked about in his prepared remarks. So we feel that we've got a lot of momentum as we're scaling those initiatives into the back half of this year and think that, that helps to support our business against that soft macro backdrop.

We recommend another question. I think Brian answered it well.

Perfect. Yes. So I guess the next one would be just expectations on SG&A for the second half, considering softer comps in September and October. And if there's been any change to the expectation that, that should be flat on a dollar basis?

Yes. Great question. So as we talked about in our remarks, we demonstrated good cost control in the quarter. SG&A was $2.8 million lower than the prior year quarter. And if you adjust for nonoperating items such as our net store closing costs or impairment charges, consulting costs related to the operational improvement plan, we were actually $4.7 million lower than the prior year in Q2.

And the decrease largely being driven by the reduction in SG&A for the store closures. So regarding our expectations for all of 2026, we continue to control expenses, but we do expect to further invest in our marketing initiatives, which will partially offset the savings that we did see in Q2 from the store closures. So as such, we expect G&A in Q3 and Q4, excluding any of the nonoperating items, to be running above where we were in Q2 and closer to that flat compared to prior year, not necessarily running consistent with what we just saw in this past quarter.

David, I want to go back to your question about tires for just a second as I reflect on that. One of the things that we did in September was promote on the website and in the drop-downs that we have tires for everyone. And as I mentioned just a few minutes ago, we've had excellent support from all of our tire vendors. I think as we move into, to your good point, the selling season as the weather turns cold in the north, we've got the right tires for everybody. And I think having the right Tier 1, Tier 2, Tier 3 and Tier 4 tire is going to matter in increasing our ability to sell units in the next couple of quarters. So we feel good about where our tire positioning is, and we emphasize that we have tires for everyone in the promotions in the fall.

Our next question comes from Brian Nagel.

First question I want to ask, and I apologize, it's repetitive, but just looking at the trajectory in comps. So here, you stayed positive in the current -- in the quarter which just reported, but it's moderated from basically mid-single-digit type gains a couple of quarters ago. As you mentioned, I mean, there's pressures on the consumer that's well documented. But I mean is there a better way to explain what's happening here? I mean how much of that comp deceleration is a tougher environment versus maybe something more internal at Monro?

I think it's a pause in the market, to be honest with you. And I think that the value that we're going to get from the incremental marketing and the store performance initiatives is going to show up in this quarter. Time will tell, but I don't think that there's anything in any of the data that we've seen as we've implemented more digital marketing in more stores that suggests we're not going to get positive growth going forward. For example, in every single tranche of stores that we've added, and we started adding stores to digital marketing in July and increased it 100 to 150 stores a month.

We've seen positive calls compared to the rest of the chain, positive comp store sales across the board, every time we've added more stores to the mix and positive gross margin dollars. So for every dollar of advertising investment, we're getting more than that back in gross margin dollars. One of the reasons that you're seeing pretty positive results in our gross margin rate. And if you think about where we are at the moment, in the second quarter, we were probably 1/4 to 1/3 in terms of marketing support. That's going to change further in the next couple of months.

As we said early on, we're going to add more stores to digital marketing effort. Final thing I would mention that encourages us about our ability to generate incremental comp store sales positive is we have focused our efforts on the digital marketing in the second quarter, and now we're adding another 350 stores to our call center. So we will have more stores in the call center in another week, and we'll have more stores that are supported with digital marketing. All of the data dating back to the summer says, as you do these things, comp store sales increase.

That's very helpful. Then I guess my follow-up is somewhat related. So you started your prepared comments just talking about, I think what you referred to as kind of the high-value customers. And then I think you referred to better performing stores within the Monro network. So the question I have is, do you -- is there a way to quantify to the extent that those customers, those stores or some type of road map for the total company, can you quantify the outperformance of the comp -- the sales or comp outperformance of those cohorts versus the chain?

So I don't want to say too much about this for competitive reasons, but one of the things that we've done in the last 3 months is a customer segmentation that's very revealing. It further supports our view that a minority of our current customers are really, really good customers. And they're customers that I would describe as value-oriented. They're looking for a bundle of services, not just tires, not just oil changes, but a number of things. And so one of the things we're doing with our content in marketing is reaching out to those customers and potential customers.

So now not only in customer acquisition, but also in CRM to reach back to our good customers from the past. And we are offering those bundles of services that we think all the data says they're interested in. Another important segment is a wealthier newer vehicle owner. And those folks want good service. And so in the content that we're providing there online, we're appealing as a trusted adviser to that type of customer. And so the customer segmentation now enables us to share different types of messages with the customers depending on what their needs are. Again, I don't want to go on too much about this. We're still developing the customer segmentation, but our advertising is now reflecting what we've learned.

Our next question comes from John Healy from Northcoast Research.

I just want to ask to put your consulting hat on a little bit here. Maybe help us understand how you get to the conclusion that things are slowing down kind of across the industry. I mean there's a lot of mixed data points. We don't see kind of negative same-store sales of the parts and service side on the franchise dealers. And I get that the mix and the repair work is different. But would love to see how you benchmark Monro, what you benchmark it to and maybe any sort of data series or just opinions on kind of how you would look at it from a consulting lens to kind of evaluate the comp performance kind of year-to-date?

Sure. Well, one of the things I love about Monro is it's a service business. It provides tires and it provides parts and the parts have to be attached in all of our locations. And so the skill of our technicians really is part of the value that the customer sees. Again and again, when we talk to customers and our own labor, we hear that. So I would compare us less to the part sellers and more to other service providers.

And there aren't a whole lot of public comps that match up exactly with us. That's one thing that's frustrated me a little bit when people look at the market and say, oh, you compare well to this particular set. We're a little bit different. We're just more of a service business than we are a retailer, but it's the combination of those things that really drives what we can deliver to the customer. And another thing I just want to emphasize is we have scale across the country with 1,116 stores that enables us to provide services on a local level that are needed. So think of us more as a service business than a parts seller. It's a real difference.

The only thing I would add there, John, is we -- on the tire side, we have syndicated data that we subscribe to, a couple of different sources for us and some publicly available, some more proprietary. But our comparisons on the tire side are against that data set. On the service side, as Peter said, there's very -- a lot less transparency there for us to be able to compare against. But highlighting the fact that we did have significant outperformance in a couple of our large service categories, including brakes and front-end shocks in the quarter, we feel pretty good. And we talked earlier in the margin commentary that those also drove some of the margin outperformance in the quarter as well.

And then just one question on cash flow and kind of capital allocation. Any thoughts on just kind of the -- any perspective you could provide on just the safety of the dividend here? I think you guys paid out what, $17 million kind of year-to-date, but not sure we're tracking there on a kind of an earnings basis to this point this year. So just your ability and willingness to keep the dividend maybe ahead of what potentially could be just the underlying earnings of the company.

Yes. When we look at the dividend, we're looking at our ability to fund the dividend as well as all of our capital allocation priorities, including our scheduled debt repayments on finance leases, our CapEx program, investing in our business and of course, maintaining a conservative balance sheet in this operating environment. And our cash flows support all of our capital allocation priorities, and we believe that to be true for the balance of FY '26 and beyond that. So we don't view it as much on a net payout ratio against income because we generate a lot of cash flow relative to our net income. So that payout ratio still makes sense to us.

We currently have no further questions. So I'll hand back to Peter for any closing remarks.

Thanks, Claire, and thanks again, everyone, for joining us today. I'm optimistic about the opportunities in front of us, and I believe Monro is well positioned to capitalize on positive industry trends as we focus on driving profitable growth. Having said this, we still have a lot of work to do. But with our recent progress, we now have a stronger foundation to create long-term value for all shareholders. I look forward to keeping you updated on progress in the quarters to come. Have a great day.

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