Monro Expanding Into California Via Acquisition; Turnaround Continues

Monro Inc. (Rochester, NY) has signed a definitive agreement to acquire California-based Certified Tire & Service Centers, which has 40 retail locations in San Francisco, San Diego and Los Angeles, as well as a distribution center in Riverside. Financial terms of the transaction were not disclosed.

The deal is expected to close in the first quarter of fiscal 2020 (for Monro, the three months ending June 30, 2019), and add roughly $45 million in annualized sales, representing a sales mix of 70 percent service and 30 percent tires.

The move represents entry into a new state for Monro and expands the company’s geographic footprint to the West Coast. Monro President and CEO Brett Ponton said the acquisition provides the company with a strong platform for further expansion in the region.

“The diversification of our geographic footprint in California represents a key milestone in the execution of our growth strategy, and we look forward to capitalizing on future opportunities in this market,” Ponton stated. “We believe that the continued execution of our ‘Monro Forward’ initiatives will position us to more effectively and efficiently integrate this and other acquisitions, creating long-term shareholder value.”

Monro plans to continue to operate all of Certified Tire’s locations.

Analysts with Jefferies LLC view the acquisition as “the most adventurous M&A move in recent memory,” noting that prior Monro management limited growth to the predominantly East Coast chain to contiguous markets.

“Given the significant size of the California fleet (roughly 15 million cars) and long average vehicle life span (limited corrosion), we see the potential for further West Coast expansion, particularly as more private equity/financial buyer backed M&A competition seems to be concentrated in the eastern U.S.,” analysts Bret Jordan, Mark Jordan and Ethan Huntley wrote in a March 21 report.

They added: “While making Monro’s target of 10-percent annual growth via M&A more achievable by expanding the target markets, we do see some incremental execution risk in bi-coastal operations.”

Jefferies’ report — which followed a day with Monro’s CEO and CFO — also asserts that the company remains in turnaround mode, with increased investment in both service and infrastructure. “Notably, just over 30 of the roughly 1,200 stores have been physically re-set, while the more customer-centric store operations model rolls out at a more rapid pace,” the analysts wrote.

The report also states that significant internal systems change appears to be in process, as a major tablet initiative is in place to give store operators more real-time data on performance. Additionally, according to Jefferies, significant labor model changes are underway in an attempt to more closely match labor skills to work complexity. “Management noted that current labor is generally overqualified, as 70 percent of Monro work orders typically require lower-skilled labor than is staffed,” the report states.