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Monro’s September-Quarter Comps Fell 2.1%

Monro Muffler Brake (Rochester, NY) was able to deliver top- and bottom-line growth in the fiscal second quarter ended Sept. 28, 2013, despite a choppy sales environment. Net income rose 18.2 percent to $13.65 million, buoyed by improved margins and the outperformance of recent acquisitions. Gross margin increased from 39.6 percent to 39.8 percent year-over-year.

Net sales increased $28.85 million, or 16.3 percent, to $205.32 million in the quarter. The growth came from recently acquired stores ($33.90 million), partially offset by a 2.1-percent decrease in comparable-store sales. On a month-by-month basis, comps were down 4.1 percent in July, down 2.8 percent in August and down 3.2 percent in September.

Comparable-store sales increased 5 percent for exhaust, 4 percent for brakes and 2 percent for oil changes. Front-end and shocks comps were flat. Comps decreased 6 percent for tires, 4 percent for alignments and 2 percent for maintenance.

President and CEO John Van Heel told analysts on an Oct. 24 conference call that it was Monro’s strong business model that enabled it to deliver sales and net income growth of 16 percent and 18 percent respectively in the fiscal second quarter. “We’re disappointed in our top-line results, which remained weaker in the second quarter than we had hoped. However, we were able to deliver bottom-line results within our guidance range with improvement in operating margin and the continued outperformance of our recent acquisitions despite what remains a choppy sales environment,” Van Heel said.

He went on to say that this performance was the result of consistent execution of the company’s proven strategy and initiatives. “During our second quarter, we delivered on our key objectives of benefiting from lower material cost, controlling operating expenses, generating strong sales and earnings contributions from our recent acquisitions, and capitalizing on opportunities to complete additional acquisitions at attractive prices,” he explained.

On Aug. 18, Monro completed the acquisition of 10 Curry’s Auto Service centers in the Washington, DC area, enabling the company to fill in an existing market. Annual sales for these stores are approximately $18 million, comprised of roughly 80 percent auto service and 20 percent tires.

In addition, Monro has signed definitive agreements to acquire 10 stores in Delaware, Maryland and Lexington, KY. Annual sales for these 10 stores are roughly $15 million and are approximately 55 percent tires and 45 percent service. These locations will allow Monro to fill in existing markets and leverage some of the company’s existing brands, Mr. Tire (for the Delaware and Maryland shops) and Towery’s Tire (in Kentucky).

Van Heel said Monro continues to see meaningful opportunity for attractive deals in the marketplace given the current macro-environment.

“The owners of target independent tire dealers are individuals who are at or nearing retirement age without an internal succession option. We presently have six [non-disclosure agreements] signed, compared to seven at the end of the first quarter, even after completing or signing three of those deals,” he told analysts on the call. “Four of these NDAs are within our footprint and two are in a contiguous market, with chains ranging in size from five to 40 locations. Based upon our recent transactions and our existing NDAs, we remain optimistic about our opportunities for additional acquisitions during the second half of our fiscal year.

“If a winter doesn’t come again and comps remain weak, we would expect smaller competitors to be impacted more significantly than Monro, which should help us to get even more deals done and grow the top line further.”

As of Sept. 28, 2013, Monro had 940 company-operated stores, compared to 853 stores a year ago. During the quarter, Monro added 12 stores and closed six.

Current-quarter sales trends have remained challenged (down 2.8 percent through Oct. 22). Van Heel said sales have been particularly soft in tires, while oil-change traffic and key service categories have remained positive.

Therefore, management now anticipates comps to decline 1 percent to 3 percent in the fiscal third quarter with earnings per share coming in between $0.41 and $0.46, compared to $0.35 a year ago. For the full fiscal year, comps are expected to come in flat to down 1 percent with earnings per share between $1.58 and $1.65, compared to prior guidance calling for $1.58 and $1.70 and last year’s $1.32.

Nonetheless, management is optimistic about improved sales performance in the second half of the fiscal year with a return to more normalized weather, particularly as Monro’s markets will be cycling against two consecutive warm winters and a two-year deferral cycle. “We haven’t included that potential upside in our sales and earnings estimates for the remainder of the year,” Van Heel said. “At the end of the day, people can only defer purchases of our products and services for so long, and we are confident that they will continue to turn to us as their trusted service provider.”

BB&T Capital Markets also sees reason for some optimism.

“Despite continued soft tire comps (-6 percent in Q2), solid expansion in Monro’s service categories points to a continued rebound in industry demand in 2013 after a notably weak 2012,” analysts Bret Jordan and David Kelley wrote in an Oct. 24 report. “Given our belief that recent deferral of tire purchases (three years of soft industry volumes) will drive a volume rebound as increasing miles driven and inclement weather should spur purchase, we believe current fiscal year 2014 comp guidance of -1 percent to 0 percent could prove conservative.”

BB&T’s report elaborates on how service gains have reversed early calendar-year 2013 trends. “As Monro posted +5 percent and +4 percent comps in exhaust and brake categories, respectively, improving service demand appears to be reversing an early calendar-year 2013 trend of declining volumes. Notably, both categories have posted significant sequential improvements year-to-date (-11 percent, 0 percent and 4 percent for brakes and -6 percent, 0 percent and 5 percent for exhaust), reinforcing our belief that recent maintenance deferral trends, an aging vehicle fleet and modestly improving miles driven should drive higher failure rates,” Jordan and Kelley point out. “As we anticipate inclement weather could drive continued accelerating demand in weather-dependent categories such as brakes, we believe Monro will continue to post solid service comps in the second half of fiscal year 2014.”

The analysts also believe that early inclement weather in November and December could be the catalyst to a reversal of tire purchasing trends. “Currently 42 percent of Monro’s sales mix, improving tire volumes could drive significant earnings expansion given Monro’s significant improvement in operating leverage (leverage -1 to 0 percent comps), with management noting each point of comp growth currently generates roughly $0.07 in incremental EPS,” Jordan and Kelley’s report states.          — Marc Vincent

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