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Monro (NASDAQ:MNRO) Reports Sales Below Analyst Estimates In Q4 Earnings


Full Report / August 21, 2023

Auto services provider Monro (NASDAQ:MNRO) missed analysts' expectations in Q4 FY2023, with revenue down 5.24% year on year to $310.8 million. Monro made a GAAP profit of $409 thousand, down from its profit of $8.62 million in the same quarter last year.

Monro (MNRO) Q4 FY2023 Highlights:

  • Revenue: $310.8 million vs analyst estimates of $322.8 million (3.69% miss)
  • EPS: $0.01 vs analyst estimates of $0.31 (-$0.30 miss)
  • Revenue Guidance for Q1 2024 is $332.5 million at the midpoint, below analyst estimates of $341.4 million
  • EPS (non-GAAP) Guidance for Q1 2024 is $0.39 at the midpoint, below analyst estimates of $0.40
  • Gross Margin (GAAP): 33.4%, up from 31.9% in the same quarter last year
  • Same-Store Sales were up 4.5% year on year

Started as a single location in Rochester, New York, Monro (NASDAQ:MNRO) provides common auto services such as brake repairs, tire replacements, and oil changes.

The core customer is someone who relies on their cars for daily needs, which is most of suburban and rural America. Monro understands that these car owners have busy lives and may lack the expertise to diagnose and address issues with their automobiles. The company therefore aims to be a one-stop-shop for everything from periodic maintenance to more involved repairs.

Monro locations are moderate in size, typically 5,000 square feet and equipped with specialty tools and technology for auto repairs. These locations are strategically located in suburban areas, close to residential neighborhoods and major roadways. Even though you can’t have your car fixed online, Monro does have an e-commerce presence where customers can schedule appointments, access information Monro’s services, and even purchase products like tires and motor oil.

Cars are complex machines that need maintenance and occasional repairs, and auto parts retailers cater to the professional mechanic as well as the do-it-yourself (DIY) fixer. Work on cars may entail replacing fluids, parts, or accessories, and these stores have the parts and accessories or these jobs. While e-commerce competition presents a risk, these stores have a leg up due to the combination of broad and deep selection as well as expertise provided by sales associates. Another change on the horizon could be the increasing penetration of electric vehicles.

Auto parts and services providers include Advance Auto Parts (NYSE:AAP), AutoZone (NYSE:AZO), O’Reilly Automotive (NASDAQ:ORLY), and private company Pep Boys.

Sales Growth

Monro is a small retailer, which sometimes brings disadvantages compared to larger competitors that benefit from economies of scale.

As you can see below, the company's annualized revenue growth rate of 2.51% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre .

Monro Total Revenue

This quarter, Monro reported a rather uninspiring 5.24% year-on-year revenue decline, missing analysts' expectations. The company is guiding for a 4.87% year-on-year revenue decline next quarter to $332.5 million, a reversal from the 2.26% year-on-year increase it had recorded in the same quarter last year. Looking ahead, the analysts covering the company expect sales to grow 5.52% over the next 12 months.

Number of Stores

The number of stores a retailer operates is a major determinant of how much it can sell, and its growth is a critical driver of how quickly company-level sales can grow.

When a retailer like Monro keeps its store footprint steady, it usually means that demand is stable and it's focused on improving its operational efficiency to increase profitability. At the end of this quarter, Monro operated 1,300 total retail locations, in line with its store count 12 months ago.

Monro Operating Retail Locations

Taking a step back, the company has kept its physical footprint more or less flat over the last two years while other consumer retail businesses have opted for growth. A flat store base means that revenue growth must come from increased e-commerce sales or higher foot traffic and sales per customer at existing stores.

Same-Store Sales

Same-store sales growth is an important metric that tracks demand for a retailer's established brick-and-mortar stores and e-commerce platform.

Monro's demand within its existing stores has generally risen over the last two years but lagged behind the broader consumer retail sector. On average, the company's same-store sales have grown by 3.12% year on year. Given its flat store count over the same period, this performance could stem from increased foot traffic at existing stores or higher e-commerce sales as the company shifts demand from in-store to online.

Monro Year On Year Same Store Sales Growth

In the latest quarter, Monro's same-store sales rose 4.5% year on year. This growth was an acceleration from the 1.4% year-on-year increase it had posted 12 months ago, which is always an encouraging sign.

Gross Margin & Pricing Power

Gross profit margins are an important measure of a retailer's pricing power, product differentiation, and negotiating leverage.

As you can see below, Monro has averaged a paltry 34.9% gross margin over the last two years. This means that the company makes $0.35 for every $1 in revenue before accounting for its operating expenses.

Monro Gross Margin (GAAP)

In Q4, Monro's gross profit margin was 33.4%, marking a 1.5 percentage point increase from 31.9% in the same quarter last year. This margin expansion was comforting to see as it could signal that the company was operating in a less competitive environment with higher pricing power, less pressure to discount products, and more stable input costs (such as distribution expenses to move goods).

Operating Margin

Operating margin is a key profitability metric for retailers because it accounts for all expenses that keep the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, Monro generated an operating profit margin of 1.99%, down 1.5 percentage points year on year. Conversely, the company's gross margin actually increased, so we can assume that the reduction was driven by poor cost controls or weaker operating leverage on fixed costs.

Monro Operating Margin (GAAP)

From an operational perspective, Monro was profitable but held back because of its expense base over the last two years. The company has produced an average operating margin of 6.86%, mediocre for a consumer retail business. On top of that, Monro's margin has slightly declined, on average, by 1.7 percentage points year on year. This shows that Monro has faced some speed bumps along the way.

EPS

Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.

In Q4, Monro reported EPS at $0.01, down from $0.25 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-range EPS growth rather than short-term movements.

Monro EPS (GAAP)

Between 2020 and 2023, Monro's adjusted diluted EPS dropped 34.2%, translating into 11.4% average annual declines. In a mature sector such as consumer retail, we tend to steer our readers away from companies with multiple years of falling EPS. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).

Return on Invested Capital (ROIC)

Monro's subpar returns on capital may signal a need for future capital raising or borrowing to fund growth. Its five-year average return on invested capital (ROIC) is 8.22%, low compared to the best retail companies that consistently pump out 25%+.

We like to track ROIC because it tells us about a company’s prospects for profitable growth and its management team's ability to achieve it through capital allocation decisions such as organic investments, acquisitions, and share buybacks. ROIC can also be used as a tool to benchmark a company's performance versus its peers, and just like how we focus on long-term investment returns, we care more about analyzing a company's long-term ROIC because short-term market volatility can distort results.

Key Takeaways from Monro's Q4 Results

With a market capitalization of $1.08 billion and more than $4.88 million in cash on hand, Monro can continue prioritizing growth.

We struggled to find many strong positives in these results. Overall, this was a mixed quarter for Monro. The company is down 2.24% on the results and currently trades at $33.15 per share.

Is Now The Time?

When considering an investment in Monro, investors should take into account its valuation and business qualities as well as what happened in the latest quarter. 

We cheer for everyone who's improving the lives of others but in the case of Monro, we'll be cheering from the sidelines. Its revenue growth has been uninspiring, but at least that growth rate is expected to increase in the short term. On top of that, unfortunately its relatively low ROIC suggests suboptimal profitability prospects and its mediocre same-store sales performance has stunted total revenue growth.

While we've no doubt one can find things to like about Monro, we think there might be better opportunities in the market, and at the moment, don't see many reasons to get involved.

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