Encouraging Sales Momentum For Monro, Yet Margins Slipped

For the fiscal first quarter ended June 30, 2018, Rochester, NY-based Monro Inc. generated $20.64 million in net income — an increase of 17.4 percent over the previous year. Gross profit rose 3.9 percent to $117.24 million; however, gross margin slipped 90 basis points to 39.6 percent.

One element driving gross margin lower were higher labor costs related to an initiative to optimize Monro’s store staffing model, adding technicians to understaffed stores to support improved traffic trends and sustain sales momentum. Management believes this should normalize as the initiative ramps up through fiscal 2019. This will come from a future “right-sizing” of overstaffed stores — a move that management expects will get the company back to a flat staffing model, while achieving greater overall store efficiency.

Other factors impacting gross margin were higher material costs (as a percentage of sales) related to “suboptimal” brake package pricing and the impact of sales mix from the Free Service Tire acquisition.

CFO Brian D’Ambrosia elaborated on the Free Service Tire impact during the company’s July 26 conference call with members of the financial community: “The commercial and wholesale locations we acquired as part of the Free Service Tire acquisition operate at a lower gross margin, primarily due to the higher sales mix of tires, and, with respect to the wholesale business, a higher sales mix of tires without installation.”

D’Ambrosia added that gross margin also was negatively impacted by pricing issues when Monro launched its good/better/best brake packages during the quarter. To combat this, the company raised its package prices late in the quarter. Going forward, management plans to continue to identify opportunities to “further optimize” Monro’s brake package pricing — including leveraging analytics to capitalize on high demand in this category.

SALES … For the quarter, Monro’s sales increased by $17.32 million, or 6.2 percent, to $295.81 million. This breaks down as roughly $14.40 million in sales from new stores and a comparable-store sales increase of 1.9 percent (on top of a 1.4-percent comp-store sales gain from a year ago).

President and CEO Brett Ponton told analysts on the call that the new fiscal year is off to a great start, as sustained momentum in the business led to strong topline performance in the first quarter. Ponton pointed out that Monro’s comp-store sales growth came from higher average ticket, improving traffic, and strength in tires and brakes.

“We are very encouraged by the improving comparable-store sales trends we saw during the quarter, which … started off negative in April due to a late spring arrival but was more than offset by a return to positive comp sales in May,” he said. “We ended the first quarter with accelerated comp-sales performance in June. And, we’re pleased to report that that momentum continued into July, with comparable-store sales up approximately 2 percent month-to-date.”

According to Ponton, May comp-store sales were up 3.3 percent, while June comps were up 3.6 percent, attributable to pent-up demand from a late spring.

Tire comps rose 2 percent, as lower unit sales were more than offset by a higher ticket resulting from the company’s optimized tire sales and pricing strategy. “We’re also very encouraged by the improvement in our online operating metrics resulting from the changes we made to our online tire-pricing strategy at the end of last year when we unbundled tires from installation,” Ponton explained. “These changes led to increased conversion and a notable increase in online service appointments.”

Brake comps increased 7 percent, and front end/shocks comps grew 2 percent. Maintenance services and alignment comps were both down about 1 percent. “We experienced strong demand in our brakes category, further supported by the launch of our good/better/best brake packages in the first quarter, which drove an 11-percent increase in our brake transaction volume,” Ponton told analysts on the call.

Geographically, Monro reported strength in its northern markets, which outperformed southern markets during the quarter.

“MONRO FORWARD” … During the call, Ponton provided an update on management’s “Monro Forward” strategy. He said management is pleased with the traction from the online reputation management program that launched across Monro’s entire store base in late February.

“We believe investments in technology and increased efforts to solicit customer feedback are paying off, as we’ve received more than 75,000 customer surveys and online reviews since we launched the pilot program in January,” Ponton said. “Early results show that improved search traffic resulting from our online reputation management program has contributed to driving higher conversion and, importantly, higher traffic to our stores. We’re also actively leveraging the customer feedback and insights from this data to drive operational improvement across our stores, which has led to a significant improvement in our overall star rating across all online review sites.”

According to Ponton, Monro has received an average online review rating of 4.6 stars since the beginning of the year, compared to 3.6 stars before the program started.

He also told analysts that the company’s store reimage initiative is progressing on schedule. “We have defined clear brand standards, identified the appropriate scope of refresh needed for each of our stores, and are currently on schedule to launch our 30-store reimage pilot in Rochester, NY in the beginning of the third quarter of fiscal 2019,” Ponton said.

Monro also is expected to launch a data-analytics-based CRM platform this quarter that’s designed to leverage customer data and insights to deliver tailored messages and service recommendations based on customers’ specific vehicle needs. Additionally, modernizing Monro’s online presence should roll out this quarter, including a mobile-capable architecture.

OUTLOOK … Based on current sales, business and economic trends, and recently announced and completed acquisitions, management now anticipates Monro’s fiscal 2019 sales to come in between $1.18 billion and $1.21 billion — an increase of 4.6 percent to 7.3 percent compared to fiscal 2018 sales. This is up from management’s previous sales guidance of $1.17 billion to $1.20 billion.

Comparable-store sales are still expected to increase 1 percent to 3 percent on a 52-week basis.       — Marc Vincent