Kate McShane: Thank you.
Lori Flees: Thanks, Kate.
Operator: Our next question comes from Bret Jordan with Jefferies. Please go ahead. Your line is open.
Bret Jordan: Hi, good morning, guys.
Lori Flees: Good morning, Bret.
Bret Jordan: In your prepared remarks when you talked about your – hi, good morning. You talked about your recent franchise committee meeting you mentioned capital reduction plans. Could you give us more color on that? And is it sort of a way to make franchise acquisition more achievable? Or I guess the fact story on that.
Lori Flees: Actually great question. Thanks for asking it. As with all retailers these past couple of years, construction costs have been going up because of inflation both on the GC labor side, just given the tightness but just in terms of material costs have been going up. And so we as a company in trying to make sure that we’re maximizing our return on capital invested are looking at ways to reduce the capital cost of new builds in order to ensure that we continue to deliver really attractive return on invested capital, which we have been doing, despite the increase in capital costs for new builds. We’ve taken an opportunity to – and hire an A&E firm to relook at our drawings from with a fresh perspective to actually figure out where we can take capital cost out of our design.
And we’re early on in that process. We’ve gotten back some initial results. We’ve engaged our franchise partners two weeks ago on some of those initial results and we’ll be taking some of the new designs to the market to bid out. And this is really just trying to get ahead of continued cost inflation and how can we bring down the capital cost. This is something that we’ve done proactively. We haven’t done it because our franchise partners have asked us to or because they’re delaying any new builds. In fact, as I mentioned, the pipeline of new builds on the franchise side is higher than it’s ever been. And the reason why is because when you look at a fresh retail site that is in the right location, given traffic and population density, the amount of traffic that you can gain with an optimized marketing spend is very attractive.
From a cash-on-cash return, although it does take more time to build up to that than buying an existing site and converting it. So we’re just getting ahead of trying to make sure that we drive the highest return on invested capital. We continue to do that and exceed by a significant amount of our cost of capital but we’re always looking for ways to cut that down. One example I’ve used is we build out the ceiling in our stores but nobody gets out of their cars. So why do we need to have a completed ceiling? That’s just extra cost which is not necessary. And so those are just the things that we’re looking at. Our design hasn’t changed in many, many years and it’s just an opportunity to take a fresh perspective.
Mary Meixelsperger: And Lori – no go ahead. Go ahead Simeon [ph].
Bret Jordan: If you had follow – if you had more on that prior question, that’s great. The follow-up question I guess would be tied to that in the – what you’re seeing in the non-oil-change services, attachment I guess you’re talking about more business with the fleet. Is that more of the same service? Or are you finding new services to add? And as you look at a new store format, is there a possibility of maybe another bay to provide services other than a pit oil change system?
Lori Flees: The non-oil change revenue increases that we’ve seen, I mentioned $1.93 in fiscal year 2023, which was our highest both in dollars for non-oil-change revenue services, is really focused on the services that we provide. And so we started the year just going through a do we have the supply and the equipment and is the equipment all in working order such that the services can be provided for any customer whose vehicle requires them. The second is, our team trained in those services to provide a quick easy trusted service delivery of those items those services. And then the third was, how do we present the services to the customers such that the customer understands why their vehicle needs it and our proposition on doing them relative to others in the marketplace.
And it’s really just going back to basics to make sure that our team is equipped and trained and can communicate what the customer acquires based on the age or the functioning of the vehicle as it presents itself to our stores. We are and always look at adding additional services. And we do see opportunities but we have to make sure that: A, they fit our proposition of Quick Easy Trusted. B, that we can train our team to do them effectively and efficiently and then make sure that we understand the requirements from a capital perspective. But we’re always looking for ways to expand our reach. And when — as we talk to fleet managers, they’re really leading some of that discussion are helping us evaluate, because they love the one-stop shop nature and the more that we can do in our stores in a quick easy trusted way.
That’s been a good discussion point in us validating where we should focus. But we don’t have anything to report at this time. We’ll, obviously, give updates and share more as we have it.
Bret Jordan: Great. Thank you.
Mary Meixelsperger: So Lori, I just wanted to go back and clarify a comment I made earlier. The average age of a vehicle we serve. I mentioned eight to nine years. That’s actually the time where we over indexed the most to the car park. The actual average age of the vehicle we serve is a little bit lower than the average age of the car park at 11 years versus the car park being at about 12.5 years. So I just spoke a little earlier on to correct that.
Operator: Our next question comes from David Lantz with Wells Fargo. Please go ahead. Your line is open.
David Lantz: Hey. Good morning and thanks for taking my question. So SG&A management was impressive in the quarter. Can you talk about some of the moving pieces in that line and how you expect that to look as we move through fiscal 2024?
Mary Meixelsperger: Yes. So, we did see really nice leverage year-over-year. That was largely driven by SG&A management. We saw 190 basis points of EBITDA margin improvement year-over-year for the quarter, of which three-fours was related to the SG&A leverage and about a-quarter of it was related to gross profit leverage where we saw some good labor efficiencies year-over-year in the quarter. I would tell you that there’s a lot of time and attention being paid on the SG&A line. We know that we’re investing in the business to maintain our higher growth rate and that does require some investment in SG&A, but we think that there’s a real opportunity from an efficiency perspective to be able to scale as well. So a lot of focus in those that area and a lot of time and attention being paid in that process especially with our new plan in place and our guidance for the coming year we expect to continue to see leverage on the SG&A line.
David Lantz: Got it. That’s helpful. And then on the fleet business, it’s less than 10% of system-wide sales today but growing really strongly at 25%. So curious how you’re thinking about one the long-term penetration? And then two how that sales growth rate could look through next year?
