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Acquisitions Drove Most Of Monro’s Quarterly Sales Increase; Comp-Store Sales Disappoint

Monro Muffer Brake’s fiscal first-quarter results were weaker than management and analysts had hoped. Softer sales in May and June drove the Rochester, NY-based company to a comparable-stores sales increase of only 1.2 percent — lower than analysts’ consensus of 3.2-percent growth and below management’s guidance calling for comp-store sales to rise between 3 percent and 4 percent.

“We believe this is primarily the result of the macro environment, as reflected by softer retail sales generally in June,” explained President and CEO John Van Heel on a July 25 conference call.

Nonetheless, management pointed out on the call that Monro’s business model and execution against its long-term strategy allowed the company to increase its market share and deliver sales and net income growth for the three months ended June 29, 2013.

Net income increased 16.6 percent to $13.57 million. However, gross margin fell from 40.3 percent to 38.3 percent year-over-year, attributable to a sales mix shift to the lower-margin tire category related primarily to recently acquired stores. These declines were offset, in part, by lower labor, distribution and occupancy costs as a percentage of sales.

Net sales rose 21.9 percent to $206.17 million. The bulk of the increase — $36 million of the $37 million year-over-year uptick — was attributable to sales from new stores, including recently acquired locations. That leaves the aforementioned 1.2-percent comparable-store sales gain.

“Consumers increasingly turned to us during the quarter to perform the necessary work to maintain and expand the life of their vehicles, as evidenced by a 2-percent increase in our comparable-store oil change traffic on top of the 2.5-percent increase last year and a 4-percent increase in comparable-store tire units in the quarter,” Van Heel told analysts on the call. “However, customers continued to defer more-costly purchases and trade down, resulting in flat or slightly positive comparable-store sales in key categories.”

Comparable-store sales increased 3 percent for alignments and 1 percent for maintenance services and tires. Comps were flat for exhaust, front end/shocks and brakes.

BB&T Capital Markets, in a July 25 report, pointed out how this trade down in tires limited Monro’s sales gains.

“Although tire units showed signs of life in Q1 with a 4-percent comp unit gain, widespread consumer trade down to low-priced import product and tire price deflation limited comparable-store sales growth to 1 percent,” explained analysts Bret Jordan and David Kelley.

While they expect trade down to continue, the BB&T analysts contend that sustained weakness in tire volumes industry-wide is unlikely to continue as accumulated tire wear ultimately creates safety and drivability issues. “Given industry forecasts for less than 2-percent unit growth in 2013, we believe Monro’s Q1 result indicates the company is likely holding or growing share in this otherwise challenged category and are optimistic that Monro may be positioned to accelerate growth as general demand eventually improves,” Jordan and Kelley wrote.

BB&T remains optimistic that regional demand trends will improve as deferred maintenance drives repair volumes and expects recent acquisitions to bolster second-half margins.

While management expects the macro environment to remain choppy in the near-term, it is optimistic about Monro’s ability to deliver comparable-store sales increases for the full year fiscal 2014 based on easy comparisons to date in the second quarter. Oil change traffic remains positive and comparable-store sales are trending flat to last year, Van Heel told analysts on the call. “We expect this trend to continue through our second quarter.”

“That said, we are optimistic that with the increase in comparable-store tire and oil change units and with more-normalized weather throughout the high tire-selling season two years of increases in customer deferrals will reverse and present a tailwind for sales in the second half of fiscal 2014,” Van Heel added. “In addition, our fiscal 2013 acquisitions have positioned Monro for profitable growth over the next several years, including fiscal 2014.”

For the current quarter, management expects comp-store sales to come in flat to up 2 percent. Diluted earnings per share are forecast at $0.41 to $0.45, which is comparable to $0.36 in the prior-year quarter.

Full year fiscal 2014 guidance calls for comp-store sales gains of 1 percent to 3 percent and earnings per share somewhere between $1.58 and $1.70. This is down from previous guidance calling for earnings per share to come in between $1.65 and $1.80, yet this is up from the $1.32 recorded for fiscal 2013.     — Marc Vincent

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