For the fiscal second quarter that ended Sept. 24, 2022, Monro Inc. saw its net income fall 37.5% to $329.82 million, and its gross profit declined 10.7% to $116.74 million. Gross margin slipped 220 basis points to 35.4%, attributable, in part, to parts inflation that the company intentionally did not fully pass on to consumers as well as investments in technician labor and wages.
“Our gross margin was impacted by inflationary cost pressures that we chose not to offset through additional increases in price to an already stretched consumer,” President and CEO Mike Broderick said on Monro’s Oct. 26 earnings call. “Raising prices when a consumer is struggling to accept them would likely result in the immediate loss of the sale and has the potential to jeopardize a longer-term relationship with a customer. And, developing this longer-term relationship with our customers is a key element of our strategy.
“Although our investments in price and labor impacted our gross margin in the second quarter, our business is well positioned with the right strategy to take advantage of longer-term industry tailwinds. We are not going to cut critical investments we’ve made in our labor force and sacrifice our long-term service model for short-term profitability.”
SALES TRENDS … Monro’s net sales decreased 5.1% to $329.82 million in the fiscal second quarter. The total sales decline of $17.88 million came from the divestiture of its wholesale and tire distribution assets to American Tire Distributors (ATD) during the fiscal first quarter. Sales for these divested assets were approximately $28.80 million in the second fiscal quarter.
Monro’s comp-store sales increased 1.3% for the quarter that ended Sept. 24, 2022, driven by a roughly 10% comp-store sales increase in approximately 300 of the company’s small or underperforming stores. It’s worth noting that comp-store sales at these shops decreased by 8% in fiscal 2022 compared to fiscal 2020. Broderick said the acceleration in sales at these 300 shops came from improved technician staffing levels and training.
Comp-store sales in the company’s remaining shops were roughly flat for the quarter.
It’s noteworthy that momentum built as the quarter progressed. The company’s monthly comp-store sales cadence was down 0.7% in July, up 1.9% in August and up 2.5% in September.
A closer look at Monro’s overall results shows that comp-store sales rose roughly 6% for tires, increased 1% for maintenance services, decreased 5% for brakes and front end/shocks, and declined 8% for alignments.
PRICING AND DEFERRALS … On the call, Broderick noted that broad-based inflationary pressures impacted demand for tires as some consumers deferred tire purchases and others traded down to lower-priced options. That’s where the company’s new partnership with ATD helped, according to management, allowing Monro to reposition its tire assortment to give customers the right tire at the right price.
“The big change for us, especially using ATD, is we changed our mix. We talk about good/better/best; the majority of our stores had only really better/best. So, we introduced opening price point using our broader distribution relationship, and we got rewarded for that,” Broderick told analysts, adding that Monro is not taking prices below market. “We’re holding our price and staying competitive. We’re now more attractive to a whole new customer, especially on the tire side, which is that opening price point tire customer.”
He also stated that consumers also made decisions to defer vehicle maintenance in some key service categories during the fiscal second quarter. However, that deferral cycle may be coming to an end.
“This is supported by strong performance in our tire category as well as improving trends in our service categories,” Broderick said. “In the second quarter, we saw a strengthening sequential demand that continued into fiscal October, with our preliminary comp-store sales up almost 4%.
“That being said, we are closely monitoring all aspects of our business, as the uncertainties of the macro environment could impact consumer demand in ways we may not anticipate.”
GOVERNANCE … Regarding recent board of directors actions, Broderick said the board has retained the services of an independent, third-party search firm to assist the nominating and corporate responsibility committee in “identifying a diverse pool of potentially qualified board candidates with appropriate skill sets and experience.”
“In addition, the independent and disinterested members of the board have initiated a process to engage a financial adviser to evaluate options for recapitalization that would provide for all of Monro’s outstanding stock to have one vote per share and for the elimination of veto power of one class of stock over another,” he told analysts on the call. “We will provide further updates on this work as appropriate.”
MISCELLANEOUS … Other items of interest from Monro’s quarterly report and earnings call …
• During the fiscal second quarter, the company closed six shops. Monro ended the period with 1,297 company-operated shops and 80 franchised locations.
• Regarding acquisitions, Broderick told analysts: “As part of our growth strategy, we continue to carefully review value-enhancing acquisitions while maintaining our disciplined approach in evaluating multiples. We have significant capacity to acquire businesses, which fit into our overall strategic plan.”
• During the fiscal second quarter, the company repurchased roughly 1.20 million shares of its common stock.
• Monro is not providing fiscal 2023 financial guidance at this time. — Reporting by Marc Vincent, Editor