For the fiscal second quarter ended Sept. 28, 2019, Monro Inc. saw its net income decrease 6.6% to $20.31 million, mainly the result of a decrease in gross margin.
While the company’s gross profit increased 1.8% to $122.07 million, Monro’s gross margin declined 140 basis points to 37.7%. President and CEO Brett Ponton told analysts on the company’s Oct. 24 earnings conference call that the gross margin decline came from higher material costs on the tire side of the business, higher-than-expected labor costs and the impact of recent acquisitions.
For the second quarter of fiscal 2020, Monro’s sales increased by $17.01 million (or 5.5%) to $324.11 million, mainly because of $17.50 million in sales from new shops, including $14.20 million from recent acquisitions. This was partially offset by an $800,000 decrease in sales from closed shops.
Monro’s comparable-store sales were flat, as higher year-over-year ticket was offset by negative traffic. From a monthly perspective, comps were up 1% in July, flat in August and down 2% in September.
“We knew our comps were increasingly difficult as we moved through the quarter when compared to gains of 1%, 4% and 5% in last year’s July, August and September, respectively,” Ponton said on the call. “In October of fiscal 2019, we posted comparable-store sales growth of +7% and are currently tracking down approximately 1% against this tough comparison.”
Tire comps were flat year-over-year, as a 1% decline in tire volume was offset by higher ticket. “While we were able to pass price on to customers with our Tier-1 [branded] tires, we were impacted by increased costs related to our more price-sensitive tires,” Ponton explained.
“We remain focused on driving strength in our largest category and have made important strides to position ourselves as a leader in the industry,” he told analysts on the call. “This has been an ongoing journey, which began over a year ago when we unbundled the price of our tires and installation online.”
On the service and repair side, Monro reported a 1% increase in brake comps, which Ponton attributed to adjustments made to pricing after a lackluster launch for its good/better/best packages. Maintenance comps were up 1%; front end and shocks were flat; and alignments declined 1%.
Geographically, the company’s southern markets outperformed its northern markets.
MARGIN IMPROVEMENT … “We believe our second-quarter results represent a low-water mark for us this year, as we’ve moved quickly to drive margin improvement,” Ponton stressed. “As you know, our sales are dependent upon technicians to perform services for our customers. We have invested in technician labor at our understaffed stores; however, our current store-staffing process does not enable us to make quick changes to labor in response to fluctuating demand dynamics. This impacted our second-quarter margins, as we were unable to rapidly adjust labor at stores where we were seeing a compression in demand.”
To rectify this in the near term, Monro put in place controls on hiring, which management expects will normalize the company’s labor costs in the back half of the current fiscal year. “In the medium term, we’re working to implement a cloud-based store-staffing and -scheduling model that will significantly improve staffing efficiency,” Ponton told analysts on the call. “Our new system will allow us to quickly and accurately rebalance the number of technicians and the level of skill sets in each store, which will be critical in driving long-term margin expansion.”
Ponton expressed disappointment with Monro’s financial results, noting that gross margin pressure significantly impacted the company’s performance. “We have quickly taken actions to improve our margin performance,” he stated.
“Positively, we’re very pleased with the strong progress we’ve made on the execution of our ‘Monro Forward’ strategy. We have conviction in our path forward but know that a transformation of this scale is rarely linear, which was reflected in our results,” Ponton said. “Although this quarter was challenging, we’ve addressed the isolated issues we faced and are moving forward toward the strong opportunity ahead.
“We’re very encouraged with the execution of our strategic initiatives, in particular our store refresh program, which we believe will be critical in enabling us to generate long-term sustainable growth. In addition to this important initiative, we have ramped up investments in technology to support our strategy and are well-positioned to capitalize on the increasing demand and evolving trends in our industry.”
OUTLOOK … Management has updated its fiscal year 2020 comp-store sales guidance range to +1% to +2% to reflect Monro’s second-quarter performance. Prior guidance called for growth of 1% to 3%.
However, based on the updated comp-store sales guidance and the contributions from new acquisitions, management raised its full-year sales expectation to a range of $1.295 billion to $1.315 billion (an increase of 7.9% to 9.6% when compared to fiscal 2019 sales). Its previous guidance called for sales to come in between $1.285 billion and $1.315 billion. — Marc Vincent