Fiscal 2012 — which, for Monro Muffler Brake, ended March 31, 2012 — was a tough-enough year. But nobody at the Rochester, NY-based service center chain saw the decline in early-spring sales coming. It left management displeased, to say the least, and analysts asking what this means both now and further on down the road.
Chairman and CEO Rob Gross admitted on a May 24 conference call that the sales trends that Monro witnessed in April and up to that point in May were “the worst seven-week sales period since I’ve been with the company.” (Gross joined the Monro in January 1999).
What’s going on, he told analysts on the call, is that the cautious consumer continues to defer and prioritize purchases. And, perhaps, the consumer is a bit worse off than all of us suspected. So, while Monro’s management believes that overall pressure on the consumer is the overriding driver of its poor start to fiscal year 2013, as Gross said: “At the end of the day, people need what we sell and can only defer purchases of our products and services for so long.”
He added that, while atypical weather patterns were a negative factor for Monro in the fiscal third and fourth quarters of 2012, it can be nothing but a positive for the company in the third and fourth quarters of fiscal 2013.
But, how bad was the start of the first quarter of fiscal 2013? Gross called it “lousy.”
Comparable-store sales through the first seven weeks of the quarter were down 7 percent, versus up 1 percent a year ago. Comp-store oil changes were up 1 percent, but the other key sales categories were down. Gross said this indicates that consumers are still visiting Monro for basic maintenance but were deferring larger purchases. “Because consumers eventually have to get these needs addressed, we would expect our traffic and sales trends to improve significantly in the coming months,” he said, noting that sales had improved in the four days prior to the May 24 conference call.
Management expects comps to decrease between 5 percent and 7 percent for the entire quarter ending June 30, 2012. That would be up against a 2-percent gain from the full quarter a year ago.
With the first quarter off to a weaker start, Monro’s comp performance in fiscal 2013 will be dampened. Gross forecast that the first quarter would be the worst, with the second quarter the second-worst. He said that the third and fourth quarters would be the company’s best because they will go up against flat comps and the fact that the previous year had “absolutely no winter and ridiculously weak unit sales of tires.”
For the full fiscal year, management anticipates that the company will produce between $750 million and $775 million in sales, which would top the $686.55 million in sales Monro recorded in fiscal 2012. Comparable-store sales growth — adjusted for days because of a difference in the number of selling days from one year to the next — is expected to come in flat (at the low end of management’s guidance) or up 3 percent (at the high end).
Gross pointed out that, historically, Monro has leveraged its business model to continue to expand its operations and enhance shareholder returns regardless of the economic or operating environment. “As we look forward, we continue to have a positive long-term outlook for our industry and company,” Gross said, “though we are more cautious near-term as we believe that higher gas prices and the macroeconomic environment will continue to weigh on consumer sentiment and purchasing behavior.”
Acquisitions will be a key part of Monro’s effort to build sales in fiscal 2013 and to position the company for stronger results in the years following. The company disclosed that it has a letter of intent on one transaction, which it anticipates closing in the quarter ending in September. The acquisition target generates roughly $25 million in annual sales.
“We are very optimistic about growing our market share further in fiscal 2013 through accelerated, disciplined and accretive acquisitions (even beyond those referred to above) that should allow us to achieve greater economies of scale while positioning the company even more strongly for the long-term.”
Gross said on the call that Monro has non-disclosure agreements (NDAs) in place with seven additional acquisition candidates. Five of those are within the company’s existing geographic footprint and two are in areas adjacent to it.
Gross emphasized to analysts that the tough operating climate for service providers — especially tire shops — makes it a good time for Monro to find good value acquisitions. “We have not seen a better environment for accelerated growth through accretive acquisitions than we’re seeing currently,” he said.
Bret Jordan and David Kelley of BB&T Capital Markets believe that the acquisition pipeline should remain an earnings driver for Monro. “With seven signed NDAs — excluding a roughly $25-million revenue acquisition expected to close in Q2 — and approximately 40 stores purchased in Q1, Monro appears on track to reach double-digit top-line growth from acquisition revenue in calendar year 2012,” the analysts wrote in a May 25 report. “Coupling this with accelerating costs and soft volumes that are likely pressuring independents, we expect the acquisition pipeline could remain robust well in to fiscal year 2014.”
They added later in the report: “As the largest company-owned and -operated car service chain, Monro remains well-positioned to integrate smaller regional chains and to further leverage already-meaningful scale in purchasing and distribution.” — Marc Vincent