Monro To Expand West Coast Presence with 18 Stores, Continues Store Refresh Plan

Monro, Inc. recently announced financial results for its second quarter, which ended Sept. 28.

During the second quarter of fiscal 2020, the company added 13 company-operated stores and closed two, ending the quarter with 1,262 company-operated stores and 98 franchised locations.

The company has signed a definitive agreement to acquire 18 stores, including 14 in Nevada and four in Idaho, both of which are new states for Monro. These locations are expected to add approximately $20 million in annualized sales, representing a sales mix of 75% service and 25% tires.

Additionally, the company has signed definitive agreements to acquire nine stores in California, expanding its presence in a recently entered state. These locations are expected to add approximately $25 million in annualized sales, representing a sales mix of 55% service and 45% tires.

These acquisitions further expand the company’s geographic footprint into the West Coast region and are expected to close in the third quarter of fiscal 2020. They are expected to be breakeven to diluted earnings per share in fiscal 2020.

The company also completed the previously announced acquisitions of eight stores in Louisiana during the second quarter of fiscal 2020, expanding its presence in a recently entered market. These locations are expected to add approximately $12 million in annualized sales, representing a sales mix of 50% service and 50% tires. These acquisitions are expected to be breakeven to diluted earnings per share in fiscal 2020.

On a combined basis, acquisitions completed and announced in fiscal 2020 represent an expected total of $120 million in annualized sales.

Second-quarter results

Sales for the second quarter of the fiscal year ending March 28, 2020 (“fiscal 2020”) increased 5.5% to $324.1 million, as compared to $307.1 million for the second quarter of the fiscal year ended March 30, 2019 (“fiscal 2019”). The total sales increase for the second quarter of $17.0 million was driven by sales from new stores of $17.5 million, including sales from recent acquisitions of $14.2 million. Comparable store sales were flat in the quarter, reflecting a 1% increase for brakes and maintenance services, flat for tires and front end/shocks, and a decrease of 1% for alignments.

Gross margin decreased 140 basis points to 37.7% in the second quarter of fiscal 2020 from 39.1% in the prior year period, primarily due to higher material costs as a percentage of sales in the tire category, higher labor costs and the impact of recent acquisitions, Monro says. Total operating expenses increased $3.3 million to $88.7 million, or 27.4% of sales, as compared to $85.4 million, or 27.8% of sales in the prior year period. Operating expenses for the second quarter of fiscal 2020 included expenses from 84 net new stores compared to the prior year period.

Operating income for the second quarter of fiscal 2020 was $33.4 million, or 10.3% of sales, as compared to $34.5 million, or 11.2% of sales in the prior year period. Interest expense was $7.0 million for the second quarter of fiscal 2020, as compared to $6.8 million for the second quarter of fiscal 2019.

Net income for the second quarter of fiscal 2020 was $20.3 million, as compared to $21.8 million in the same period of the prior year. Diluted earnings per share for the second quarter of fiscal 2020 were $.60, compared to diluted earnings per share of $.65 in the second quarter of fiscal 2019, which included $.02 per share in one-time costs related to “Monro.Forward” investments. Net income for the second quarter of fiscal 2020 reflects an effective tax rate of 23.6%, as compared to 22.2% in the prior year period.

“We are disappointed in our second quarter results, which were significantly impacted by gross margin pressures related to higher than expected tire and labor costs. However, we believe the second quarter represents a low watermark for us this year, as we quickly took action to rectify our margin pressures in the near-term and are implementing initiatives to drive margin expansion moving forward. As a result of our performance this quarter, we are lowering our full-year guidance ranges, but we remain confident our transformation is creating a sustainable platform for long-term value creation,” said Brett Ponton, president and chief executive officer.

Ponton continued, “Positively, we substantially completed the re-image of approximately 120 stores across a number of markets, representing a significant step forward in our store refresh program. This initiative is a critical component of our Monro.Forward strategy as it underpins our ability to drive sustainable growth, as evidenced by the double-digit increase in comparable store sales our pilot stores have generated following the completion of their re-image. While the disruption at the stores being re-imaged this quarter was more than anticipated, we believe the larger base of refreshed stores will be instrumental in driving comparable store sales improvement as we progress through the remainder of fiscal 2020 and beyond. In addition, we remain committed to executing on attractive acquisition opportunities, as evidenced by our continued expansion into the West Coast region.”

Company Outlook

Based on current sales, business and economic trends, and recently announced and completed acquisitions, the company now anticipates fiscal 2020 sales to be in the range of $1.295 billion to $1.315 billion, an increase of 7.9% to 9.6% as compared to fiscal 2019 sales, versus the previous range of $1.285 billion to $1.315 billion. In light of comparable store sales trends during the second quarter, guidance for fiscal 2020 comparable store sales has been revised to an anticipated increase of 1% to 2%, compared to the previous guidance of an increase of 1% to 3%. The revised guidance assumes improving comparable store sales growth in the second half of the year, as initially contemplated in the full-year guidance provided on July 25, 2019, Monro says.

To reflect the impact of its second quarter performance, the company now anticipates its fiscal 2020 diluted earnings per share to be in the range of $2.45 to $2.55, compared to the previous range of $2.55 to $2.75, Monro says. This guidance compares to diluted earnings per share of $2.37 in fiscal 2019. At the midpoint, this guidance implies diluted earnings per share of $1.24 in the second half of fiscal 2020, an increase of 11.7% as compared to the second half of fiscal 2019. The diluted earnings per share guidance is based on 34.0 million diluted weighted average shares outstanding.