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Monro Reports ‘Solid’ Results Despite Mild Weather, Deferrals

Rob Gross, the chairman and CEO of Monro Muffler Brake, called the recently completed quarter “solid” and then qualified it by adding given the tough operating environment. On the surface, the numbers were very good. Net sales increased 6.8 percent to $176.73 million, and net income rose 22.5 percent to $13.55 million — both records for the Rochester, NY-based auto repair chain.

“During the third quarter, we once again achieved strong profitability despite a continuing difficult economic environment, due largely to our recent acquisitions outperforming our expectations and continued operating leverage through a focus on cost control,” Gross said. “We generated solid performance across many of our major service categories during the third quarter as consumers continued prioritizing repairs in order to extend the life of their vehicles. However, this was somewhat offset as we were negatively impacted by an unseasonably warm quarter, leading consumers to delay purchases, especially tires, needed to prepare their cars for winter. “

Traffic was down 2 percent for the quarter because of a number of factors: high gas prices, high unemployment and weather to name a few. Mild weather allowed consumers to delay purchases needed to prepare their cars for the winter, especially tires. And this came at a time when consumers already were looking to put off needed repairs.

Comparable-store sales were essentially flat with one more day in the 2012 quarter versus a 5.4-percent increase a year ago. Comps rose 14 percent for exhaust (the largest increase in 16 years), 6 percent for brakes and 2 percent for front end/shocks. Maintenance services comps were flat, while tires and alignment comps were down 4 percent (the first time in 10 years that tire comps were down).

Tires account for 38 percent of Monro’s sales mix — significantly higher than the competition. So, coming off three straight years averaging 8- to 9-percent tire comps, tires are weighing Monro down. “That said, we are continuing to promote sales in key categories through specific programs such as “Oil Change & More,” in which our customers are seeing free tire rotations and brake inspections with the purchase of an oil change, and “Brakes Forever,” in which we guarantee brake pads for the life of the car and will replace pads for only the cost of labor,” Gross explained on a Jan. 24 call with members of the financial community. “We believe these initiatives continue to create value for the customers and build trust.”

Tires, more specifically, cost increases tied to tires, as well as oil, also are a drag on Monro’s business. “Although we continue to leverage the increased purchasing power that has resulted from our tire store acquisitions and shifting purchases between our broad base of vendors, over the past several quarters we have also implemented higher-than-normal retail price increases to offset the higher tire and oil costs,” Gross told analysts on the call. “However, many of our industry competitors have not followed suit, and, during this year’s third quarter, we decided not to pass along certain price increases to consumers and also chose to cut back on planned advertising increases in this area, which impacted our gross margin and tempered our top-line results.”

Gross margin decreased from 39.1 percent to 38.4 percent because of increased tire and oil costs and management’s decision not to pass certain increases along to consumers. “In retrospect, this was a mistake — particularly given the weak sales environment during the quarter in part due to warmer weather,” Gross admitted. “In January, we raised tire prices.”

Gross said management is focused on leveraging Monro’s model to create sustainable, long-term value, which it believes is the best strategy for the company. “We continue to see an opportunity to offset any future gross margin pressure — and hopefully deliver incremental benefit — by increasing our direct international sourcing (primarily from China) to a run rate of approximately 36 percent of our total product cost (less oil and outlies) by the end of this fiscal year,” he told analysts on the call, adding that, at the same time, management is carefully managing cost.

Gross emphasized that Monro’s flexible business model has provided the company with the opportunity to pull different levers and generate solid performance across many areas of the business. “We are confident that this flexibility will continue to be an advantage going forward,” he said.

For the current quarter (the fiscal fourth quarter at Monro), management expects comparable-store sales growth in the range of 1 percent to 4 percent, adjusted for days. This compares to flat comps a year ago. January got off to a strong start, with comps up 6 percent (up 9 percent for one less selling day) and entire sales up 9 percent. “The weakness that we saw in the later half of the third quarter was possibly the result of unusually warm weather and customers prioritizing holiday spending and might not be a trend that is carrying forward,” Gross said.

For fiscal 2012, management anticipates comps to increase between 2 percent and 3 percent (flat to 1 percent, adjusted for days) with total sales coming in around $690 million.            — Marc Vincent