Q3 2024 Earnings Summary
- Strong growth in the fleet business, which is exceeding overall company growth and represents a significant opportunity as it currently accounts for less than 10% of sales. This growth is driven by signing new fleet accounts and increasing penetration within existing accounts, leading to higher tickets and transactions.
- Robust pipeline and progress in unit growth, with significant advancements in franchise unit growth, achieving 48 new units year-to-date compared to 25 last year, indicating strong expansion and capacity to meet or exceed targets of 140 to 170 new units for the year.
- Consistent same-store sales growth, achieving the 18th consecutive year of same-store sales increases, and strong performance in both mature and new stores, demonstrating resilience and strength in business fundamentals despite macroeconomic challenges.
- Same-store sales growth is slowing, with Q3 same-store sales at 6.5%, which is at the lower end of Valvoline's historical range. The company noted that customer base growth has moderated due to aggressive advertising and discounting in the marketplace, suggesting increasing competitive pressures may be impacting growth.
- Potential future increases in lubricant costs could squeeze margins. Valvoline acknowledged that rising crude oil prices, influenced by recent activities in the Middle East, may eventually lead to higher base oil and lubricant costs. While they haven't seen this impact yet, it could affect future quarters.
- Operational risks from ERP implementation and internal control weaknesses exist. After implementing a new ERP system on January 1, 2024, the company faced challenges with the IT general control environment, leading to a material weakness that they expect to remediate by the end of the year. Remaining open items and the need for testing and validation pose potential risks.
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Refranchising Impact and Plans
Q: What's the potential for more refranchising in the future?
A: Management is considering additional refranchising when partners can drive accelerated network growth and shareholder returns. The recent Las Vegas refranchising involves a long-term partner committed to adding more new units than the company would, enhancing overall growth and capital efficiency. The impact on Q4 EBITDA is less than $2 million. Detailed impacts for fiscal '25 will be provided in the next quarter's guidance. -
Q4 Same-Store Sales Outlook
Q: How is the fourth quarter same-store sales outlook shaping up?
A: Due to a hurricane and a $5 million impact from a CrowdStrike issue in July, same-store sales are expected to be toward the low end of the range, potentially slightly below. The CrowdStrike incident affected July comps by 30 to 50 basis points. -
Labor Leverage and Gross Margin
Q: Why wasn't there more gross margin leverage in Q3?
A: Incremental labor leverage wasn't expected in Q3 since labor management initiatives began in Q3 last year. Labor costs as a percentage of sales were flat year-over-year, and this trend is expected to continue in Q4. Future improvements are anticipated from technology and process deployments to enhance labor efficiency. -
2025 Guidance and Outlook
Q: Should we expect typical comp sales and earnings next year?
A: While specific guidance isn't provided at Q3, management is optimistic about fiscal '25 due to a robust pipeline and strong unit growth in both franchise and company stores. The impact of refranchising on next year's results will be detailed in the upcoming year-end earnings call. -
Advertising Spend and Competitive Pressure
Q: Are you forced to spend more on advertising due to competition?
A: The company observed increased advertising and some steep discounting by competitors early in the quarter. Valvoline chose not to match deep discounts but adjusted its advertising strategies to maintain a strong return on ad spend and keep customer acquisition costs at acceptable levels. -
Fleet Business Growth
Q: How is the fleet business performing and what's its potential?
A: The fleet business, accounting for less than 10% of sales, is experiencing strong growth exceeding overall company trends. By signing new accounts and enhancing services, the fleet segment adds attractive margins and higher tickets compared to average consumers. -
Performance in Low-Income Markets
Q: How are stores in low-income areas performing amid increased promotions?
A: Slight increases in discount rates and slightly lower non-oil-change service penetration are seen in lower-income areas. Customers in these demographics are more coupon-savvy, but the differences are minimal and not widespread. The lowest income quartile includes areas with household incomes below $60,000. -
Pricing and Lubricant Costs
Q: How are lubricant costs and pricing expected to trend?
A: Lubricant costs have been stable throughout the year. Management is monitoring potential impacts from global events on crude oil prices but doesn't anticipate short-term effects on costs for fiscal Q4. -
Non-Oil-Change Revenue Growth
Q: Is non-oil-change revenue showing customer sensitivity?
A: Non-oil-change revenue continues to contribute 100 to 150 basis points to same-store sales. Growth is driven by educating customers on preventative maintenance, with consumers holding onto vehicles longer and no significant service deferrals observed. -
Competitive Pricing Strategies
Q: Have you seen a return to discounting by competitors in July?
A: No significant pricing changes have been observed into July. Competitor discounting occurs occasionally but hasn't impacted Valvoline's sustained same-store sales growth over 18 years, attributed to their quick, easy, and trusted service experience.