Monro Reports Third Consecutive Quarter Of Double-Digit Comp Growth

For the fiscal third quarter ended Dec. 25, 2021, Monro Inc. saw its net income rise 143.7% to $16.29 million with adjusted net income up 121.8%. Gross profit increased 25.4% to $120.58 million with gross margin up 150 basis points to 35.3% accelerating from the 140-basis-points improvement the company reported for the fiscal second quarter.

Management pegged the increase in gross margin to higher comparable-store sales, which resulted in lower fixed distribution and occupancy costs as a percentage of sales, as well as a larger sales mix of higher-margin service categories when compared to the prior-year period. (Service categories increased to roughly 44% of Monro’s total sales compared to 43% a year ago).

Meanwhile, incremental investments in technicians offset the increase in gross margin and resulted in higher tech payroll costs as a percentage of sales compared to the same period a year ago.

SALES … Monro’s sales grew 20.1% to $341.78 million in the third quarter, attributable to a comp-store sales gain of 13.8% and an increase in sales from new stores of roughly $18.50 million (primarily from recent acquisitions). This compares to a decrease in comp-store sales of 13.0% in the prior-year period when Monro experienced a drop in traffic related to the COVID-19 pandemic.

Notably, the company turned in its third consecutive quarter of double-digit comp-store sales growth, and Monro’s topline performance exceeded pre-pandemic sales levels (up 4%) for a third straight quarter.

By month, comps increased 13.8% in October, 17.5% in November and 9.0% in December.

By category, comps rose 28% for brakes and for alignments, 14% for frontend/shocks, and 11% for tires and for maintenance services.

Geographically, Monro reported double-digit comps across all of its regions with a slight outperformance in the West and in the North, attributable to coming out of more difficult year-over-year comparisons.

Comps continue to be led by ticket.

“We’re seeing better traffic trends, particularly year-over-year, but it was led by ticket and that has continued into the quarter,” Executive Vice President and CFO Brian D’Ambrosia said on Monro’s Jan. 26 earnings call. “Our team has done a really good job of executing in store when the guest comes in with recommending other needed work. That’s really done through our courtesy inspection, but you need the staffing in store to be able to do that and the training in attachment selling.”

STAFFING … In the third quarter, Monro added more than 200 net new technicians. This is incremental to the more than 250 technicians the company added in the previous quarter. And, embedded within these net new technician adds is a 10% improvement in turnover between the fiscal second and third quarters amid a tight labor market.

On the earnings call, President and CEO Mike Broderick provided the following context: “Many of our stores are understaffed with some technicians working upwards of 70 hours per week with little to no time off. Among other things, this leads to unwanted turnover of experienced technicians. The turnover in these technicians leads to stores that are further understaffed and a customer experience that is inconsistent and far from desirable. This results in lower sales and is a key contributor to inconsistent operating performance. The investments we’re making in labor are specifically aimed at addressing and resolving these issues and ensuring a more sustainable business model longer term.”

In the short term, the added staffing helped Monro ride out increased absences during the omicron surge of late December and January

Over the longer term, management believes this positions the company to better capitalize on improving miles traveled (VMT) as well as consumers holding onto their cars longer.

STORES … As of Dec. 25, 2021, Monro had 1,303 company-operated shops and 81 franchised locations. That’s 43 more shops than a year ago.

During the third quarter, the company closed two shops and completed its previously announced acquisition of 17 locations (six in Southern California and 11 in Iowa).

The acquired shops are expected to add roughly $25 million in annualized sales. They bring Monro’s fiscal year-to-date acquisition total to 47 shops with expected annualized sales of $70 million.

D’Ambrosia told analysts on the call that opportunities remain for more acquisitions. “We have 10-plus [non-disclosure agreements (NDAs)] signed, which is consistent with what we’ve had, and we feel like we’re in a really good position to be able to execute on some of those in order to continue our acquisition growth strategy,” he said. “We’ve got a strong balance sheet. We’re generating a lot of cash.”

Meanwhile, the company initiated and substantially completed the re-imaging of 53 recently acquired shops on the West Coast during the third quarter. Along these lines, Monro is in the process of finalizing a full review of its brand portfolio. Once complete, Broderick said the company intends to expand its re-imaging program to a broader number of locations across the country.

“We are also continuing to perform a review of the inventory stocking plan needed to support any store-level brand changes,” Broderick noted.

MISCELLANEOUS … Other items of interest related to Monro’s quarterly report and earnings call …
In terms of outside purchase management, Broderick told analysts that Monro is consolidating its purchasing behind its high-quality, high-availability, low-cost preferred suppliers to gain economies of scale. “This allows us to build strong partnerships with fewer suppliers,” he said. “This consolidation, along with our pricing power and category management, has allowed us to significantly offset cost pressures in tires and parts.”
Thus far in the current quarter (for Monro, its fiscal fourth quarter), comp-store sales were up 1% in January because of a combination of COVID-related absences and tough year-over-year comparisons, as the year-ago period had various stimulus, child tax credit and other disbursements that have not been in place in the 2022 calendar year.
Analysts with Jefferies LLC wrote in an Jan. 26 report that they are encouraged that more seasonal winter weather could provide a tailwind to sales. “While [quarter-to-date] headline comps of +1% are slowing versus recent trends, we note the two-year stack against tougher compares (+3% January 2021) is showing resilience,” Bret Jordan and Ethan Huntley wrote. “We continue to see a rebound in VMT to near pre-pandemic levels driving service demand, while improved technician capacity and execution drive longer-term growth.”        — Marc Vincent

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