Monro’s Gross Margin Rises, But Store Closures Cut Revenue

Date of Call: Jan 28, 2026

Financials Results

• Revenue: $293.4 million, down 4% YOY
• EPS: $0.35 per diluted share, compared to $0.15 for the same period last year
• Gross Margin: 34.9%, increased 60 basis points YOY
• Operating Margin: 6.3% of sales, compared to 3.3% of sales in the prior year period

Guidance:

• Expect to deliver year-over-year comparable store sales growth in fiscal 2026.
• Store optimization plan to reduce total sales by approximately $45 million in fiscal 2026.
• Full year gross margin for fiscal 2026 expected to be consistent with fiscal 2025.
• Expect to generate sufficient cash flow to maintain a strong financial position and fund all capital allocation priorities, including the dividend.
• Capital expenditures expected to be $25 million to $35 million.

Business Commentary:

Customer Acquisition and Marketing Efforts:

• Monro expanded its digital marketing to over 340 additional store locations in Q3, contributing to improved store performance metrics like calls, comp store sales, and gross margin dollars.
• The company activated its CRM database and added call center support to 114 additional stores, with plans to roll out these services to the remaining stores.
• The expansion was part of a disciplined phased rollout designed to ensure appropriate returns on marketing investments.

Operational and Store Performance Improvements:

• Monro continued to expand the use of its ConfiDrive inspection tool across stores, enhancing transparency in vehicle inspections and improving customer experience.
• The company completed a field realignment, increasing the quality of district managers and enabling faster communication and improved training and coaching.
• Operational readiness assessments were conducted to determine the best positioning for marketing support, focusing on store performance.

Gross Margin and Cost Management:

• Monro reported a gross margin rate increase of 60 basis points year-over-year to 34.9%, driven by lower material costs and occupancy costs as a percentage of sales.
• Technician labor costs increased due to wage inflation but improved compared to the first half of the year.
• The company managed tariff impacts effectively, maintaining solid gross margins without significant effects on pricing or product costs.

Inventory and Real Estate Dispositions:

• Monro reduced inventory levels by over $7 million in Q3, achieving a total inventory reduction of more than $28 million or 16% since March.
• The company exited 32 leases and sold 20 owned locations, generating $17.3 million in proceeds, with cumulative proceeds totaling $22.8 million year-to-date.
• Real estate dispositions were part of the strategy to exit locations closed due to underperformance, focusing on positive cash flow and improved performance in continuing locations.

Comparable Store Sales and Consumer Demand:

• Monro reported a 1.2% increase in comparable store sales, driven by positive performance in November and December, marking the first positive two-year stack in over two years.
• The tire category was up 5%, with Monro believing it outperformed the industry despite a 1% decline in tire units.
• Sales momentum continued into fiscal January with preliminary comp store sales up nearly 1%, supported by increased marketing spend and expected consumer tax refunds.

Sentiment Analysis:

Overall Tone: Positive

• Management expressed being "pleased with the progress" and noted "positive momentum." They achieved "fourth consecutive quarter of positive comps," "delivered solid gross margin performance," and "inventory reduction of more than $28 million." They are "optimistic about the opportunities" and "well positioned for growth."

Q&A:

• Question from Tom Wendler (Stephens Inc.): Can you help us gauge the impact digital marketing had on same-store sales this quarter?
  Response: Digital marketing, CRM, and call center support collectively drove better performance in supported stores, with the impact expected to continue driving incremental comp store sales.

• Question from Tom Wendler (Stephens Inc.): How should we think about the rollout of digital marketing to the remainder of the stores?
  Response: Marketing investment will be disciplined and vary by store based on ROI; all stores will eventually receive some support, but timing depends on operational readiness and staffing.

• Question from David Lantz (Wells Fargo Securities): Can you talk about the puts and takes in gross margin for Q3 and expectations for Q4?
  Response: Gross margin expanded 60 bps YOY in Q3 due to lower material and occupancy costs, partially offset by higher technician labor costs. Q4 gross margin expected to be above prior year to achieve full-year consistency.

• Question from David Lantz (Wells Fargo Securities): Can you frame the potential benefits from Winter Storm Fern?
  Response: The storm drove consumer demand, and the company was well-prepared to meet it. Post-storm, incremental sales are expected as more people recognize the need to keep their vehicles safe.

• Question from Bret Jordan (Jefferies): Could you talk about the comp ticket versus traffic contribution?
  Response: Traffic was down mid-single digits, offset by mid-single-digit repair order increase, leading to a 1.2% comp sales increase.

• Question from Bret Jordan (Jefferies): Are the values for the remaining 15 owned locations to be sold similar to what's already been sold?
  Response: The remaining owned stores are recorded at approximately $5 million (minimum expected value) and are expected to be sold at or above that value.

• Question from Brian Nagel (Oppenheimer): What are we playing for in terms of comp store sales and expense leverage?
  Response: Expect marketing and store improvement efforts to drive a lift in comp store sales and solid gross margin over the coming quarters, leading to incremental profit and operating leverage, though wage pressure and other initiatives may require investment.

• Question from Brian Nagel (Oppenheimer): How do you think about the duration of benefits from weather and higher tax refunds?
  Response: Short-term benefits are expected from the challenging winter and higher tax refunds, with longer-term growth driven by mature initiatives like ConfiDrive increasing high-margin service revenue.

Contradiction Point 1

Gross Margin Drivers and Expectations

Gross margin improvement attribution and quarterly expectations conflict.

What were the key factors affecting Q3 gross margin across distribution, occupancy, material costs, and technician labor, and what are the expectations for Q4? - David Lantz (Wells Fargo Securities)

2026Q3: Q3 gross margin expanded 60 bps to 34.9%, driven by 80 bps benefit from lower material costs... and 30 bps from lower occupancy costs... partially offset by 50 bps increase in technician labor costs... For Q4, full-year gross margin is expected to be consistent with prior year, implying Q4 margins need to be above prior year to offset a tough Q1 compare. - [Brian D'Ambrosia](CFO)

What are the key drivers behind the 50 bps gross margin improvement from material costs, including vendor cost reductions and changes in product assortment? - Tom Wendler (Stephens)

2026Q2: The 40 bps gross margin improvement in Q2 was driven by a 70 bps benefit from higher comps and store closures (occupancy costs), a 50 bps improvement from better service category margins, partially offset by an 80 bps increase in technician labor costs... Full-year gross margin is expected to be consistent with 2025, implying higher margins in H2. - [Brian D'Ambrosia](CFO)

Contradiction Point 2

Consumer Demand Outlook

Characterization of current consumer demand environment differs significantly.

What are the potential benefits of Winter Storm Fern for your store base and comps in the coming months? - David Lantz (Wells Fargo Securities)

2026Q3: Monro met consumer demand during the storm and expects incremental sales over the next weeks... The storm is a positive impact. - [Peter Fitzsimmons](CEO)

Are specific customer segments experiencing more difficulty, is there increased trade-down activity, and are you maintaining the Tier 3 tire strategy? - Tom Wendler (Stephens)

2026Q2: The lower-income consumer is feeling pressure. However, Monro's services are nondiscretionary... They have excellent support from all tire vendors. - [Peter Fitzsimmons](CEO)

Contradiction Point 3

Gross Margin Trajectory and Expectations

Expectations for gross margin pressure and recovery timeline conflict between quarters.

What were the key drivers of gross margin in Q3 across distribution, occupancy, material costs, and technician labor, and what are the expectations for Q4? - David Lantz (Wells Fargo Securities)

2026Q3: Q3 gross margin expanded 60 bps to 34.9%... For Q4, full-year gross margin is expected to be consistent with prior year, implying Q4 margins need to be above prior year to offset a tough Q1 compare. - [Brian D'Ambrosia](CFO)

Can you provide details on gross margin, including the yearly trajectory and the impact of higher technician labor costs, material costs, and B&O leverage? - David Michael Lantz (Wells Fargo Securities, LLC)

2026Q1: For the full year, gross margin pressure is expected to continue, but comparisons will ease as the year progresses, with improvement anticipated in the latter part of the second half. - [Brian J. D'Ambrosia](CFO)

Contradiction Point 4

Digital Marketing Rollout Strategy

Inconsistency in the expected timing and universality of digital marketing support for stores.

What was the impact of digital marketing on same-store sales this quarter? - Tom Wendler (Stephens Inc.)

2026Q3: All stores will eventually receive some marketing support, with investment varying based on ROI." "All stores will get marketing support at the right time. - [Peter Fitzsimmons](CEO)

Can you provide more color on self-funded promotions' impact on gross margins, discuss the strategy for customer acquisition and marketing, and outline the approach to improving customer experience? - Thomas Wendler (Stephens, Inc.)

2025Q4: Marketing spend will be reallocated to attract these preferred customers. - [Peter Fitzsimmons](CEO)

Contradiction Point 5

Gross Margin Trajectory

Conflicting guidance on gross margin pressure for the upcoming fiscal year.

What was the Q3 gross margin breakdown across distribution, occupancy, material costs, and technician labor, and what are the expectations for Q4? - David Lantz (Wells Fargo Securities)

2026Q3: For Q4, full-year gross margin is expected to be consistent with prior year, implying Q4 margins need to be above prior year to offset a tough Q1 compare. - [Brian D'Ambrosia](CFO)

Can you discuss the impact of self-funded promotions on gross margins, the strategy for customer acquisition and marketing, and the approach to improving customer experience? - Thomas Wendler (Stephens, Inc.)

2025Q4: Gross margins are expected to remain pressured in FY 2026 due to baseline cost inflation and potential tariff impacts... - [Brian D'Ambrosia](CFO)