Monro’s total sales declined 5.2% to $310.84 million for the fiscal fourth quarter ended March 25, 2023. Management attributed the sales decline of $17.19 million to the divestiture of its wholesale tire and distribution assets in the first quarter of the fiscal year. It’s worth noting that sales for these divested assets were approximately $30 million in the prior fiscal year’s fourth quarter.
Comparable-store sales increased 4.5% for the quarter, driven by an approximate 7% comp-store sales increase in roughly 300 of the company’s small or underperforming shops.
As you may recall, one of Monro’s strategies is to improve its small or underperforming locations, which represent about a quarter of the company’s overall store base. “These stores have plenty of runway for growth ahead,” President and CEO Mike Broderick told analysts on Monro’s May 18 earnings call, “and improvements in their performance represent a multiyear opportunity for our company.”
Broderick added that the acceleration in sales at these locations is a direct result of efforts to improve technician staffing levels as well as training initiatives, which are allowing these shops to better meet customer demand.
Adjusting for one fewer selling day in the current-year quarter, Monro’s overall comp-store sales were up 5.6%, which was in line with management’s guidance calling for a mid-single-digit increase.
A closer look shows that comp-store sales, adjusted for days …
• Rose approximately 15% for batteries.
• Increased 11% for maintenance services.
• Grew 5% for brakes.
• Increased 5% for tires.
• Declined 4% for front end/shocks.
• Decreased 3% for alignments.
Notably, the company’s comp-store sales gain came almost exclusively from pricing, as the customer count was flat.
By month, January comps were up 8%, February comps were up 5% and March comps were up 1%. Analysts with Jefferies LLC posited that the deceleration may be tied to intra-quarter pricing actions, noting that March was the weakest month despite having the lowest year-over-year bar.
Monro’s gross profit decreased 0.8% to $103.80 million; however, its gross margin increased 150 basis points to 33.4% on a year-over-year basis. The improvement primarily came from the aforementioned divestiture as well as material costs and distribution and occupancy costs that were lower as a percentage of sales. This was partially offset by an increase in technician labor costs and wage inflation in addition to continued customer trade downs to opening-price-point tires.
Recognizing customers were skewing their purchasing toward opening price points, Monro raised prices on its opening-price-point tires, which led to an improvement in gross margins as the fourth quarter progressed. The company also reduced non-productive labor cost, including overtime hours in its shops.
“We took decisive actions to improve our margins as the fourth quarter progressed,” Broderick said. “Encouragingly, our actions allowed us to exit the fourth quarter with a fiscal March that was the strongest month in terms of gross margin performance of the three-month period. And, profitability improvements from our actions have continued into the first quarter of fiscal 2024.”
The company’s net income fell 95.3% to $409,000, and adjusted net income declined 59.9% to $2.67 million.
“Our profitability in the fourth quarter fell short of our expectations,” Broderick told analysts on the call. “While disappointing, we are confident that this lower profitability was isolated to the quarter and does not represent the level of profitability that our strategy and initiatives are designed to achieve over the longer-term. We took decisive actions to improve our margins as the fourth quarter progressed, and profitability improvements from our actions have continued into the first quarter of fiscal 2024.”
He also stated: “Our strategy and initiatives have been designed to drive our business towards consistently delivering mid- to single-digit comparable-store sales growth, and we are committed to maintaining a balanced approach between tire and service categories that will allow us to leverage our cost structure to deliver enhanced profitability at our stores. Also, an important focus of our strategy is cash creation. We are unlocking cash from the business by optimizing inventory and leveraging the strength of our vendor partners for better availability, quality, and cost of parts and tires in our stores. While we have made substantial progress on the sales and cash creation pillars of our overall strategy, we have significant opportunities ahead to expand margins.”
Looking ahead, Monro provided the following guidance for the first quarter of fiscal 2024 …
• Comparable-store sales are expected to range between 2% and 3%. (Comps were up approximately 2% quarter to date).
• Total company sales are expected to come in between $330 million and $335 million.
• Gross margin is forecast to come in between 35.8% and 36.2%.
Analysts with Jefferies wrote in a May 18 report following Monro’s earnings call: “Following Q4 actions to expand volumes in higher-margin tire mix as well as an emphasis towards service offerings, management noted March saw the strongest monthly margin performance during Q4 — a trend which we expect continues into the fiscal year 2024, as pricing actions take effect and labor efficiency improves if Monro is able to expand volumes in service and maintenance offerings.”
For the three months that ended March 25, 2023, the company acquired five shops, opened two shops and closed four shops. Monro ended the quarter with 1,299 company-operated shops and 77 franchised locations. — Reporting by Marc Vincent, editor.
