Monro, Inc. announced financial results for its first quarter, ending June 25, 2022, and reported that sales increased 2.3% to $349.5 million, as compared to $341.8 million for the first quarter of the fiscal year ending March 26, 2022.

During the first quarter of fiscal 2023, the company opened three stores and closed four stores. Monro ended the quarter with 1,303 company-operated stores and 80 franchised locations.

“Our first-quarter results demonstrate clear progress in our strategy to improve our small or underperforming stores through our staffing initiatives,” says Mike Broderick, president and CEO. “Our retail locations delivered comparable store sales growth of approximately 3%, driven by outsized comparable store sales growth of 15% in approximately 300 small or underperforming stores. This acceleration is a direct result of the labor capacity improvements we’ve made to meet customer demand. We are now in the final stages of our technician hiring efforts. Operational improvements in our in-store execution represent our greatest opportunity and are in our control. Properly training our technicians, between front-of-shop and back-of-shop, allocating resources for shop investments and delivering an outstanding guest experience will be critical to meeting our mid-single digit comparable store sales growth expectations.

“While comparable store sales in our 300 small or underperforming stores were up nearly 10%, softness in consumer demand in our remaining locations resulted in a decrease in preliminary comparable store sales of less than 1% for fiscal July. With our staffing initiatives almost complete, we are carefully managing expenses in the business, which we expect to drive profitability. As we continue to capture productivity improvements from our technician staffing investments, we expect to deliver better results as fiscal 2023 progresses”, Broderick said.

He added that Monro successfully completed the divestiture of its “non-core” wholesale and tire distribution assets to American Tire Distributors (ATD) for a total transaction value of $102 million. In the report, Monro says the supply agreement, which provides for tire distribution directly to its stores, will improve the company’s tire availability and is expected to allow Monro locations to “be a better seller of tires at higher margins.”

“We are pleased that our partnership with ATD is off to a great start, giving us much better availability of tires, quicker delivery and better pricing. Aside from the cash flow generated from this transaction, it has sharpened our focus on our retail store operations. We will concentrate all of our energy and resources on our core strength as a retailer,” he says. “The proceeds received from the divestiture, excess cash being generated by our retail operations and the strength of our balance sheet allows us to continue to return capital to our shareholders as we pursue our growth strategy.”

Q1 Financial Results

In its earnings report, Monro says it had a total sales increase for the first quarter of $7.7 million, resulting from a comparable store sales increase of 0.4% for the period and an increase in sales from new stores of $11 million, primarily from recent acquisitions. This compares to an increase in comparable store sales of 34.5% in the prior year period. Monro says comparable store sales increased 2.8% in the company’s retail locations, driven by a 15% comparable store sales increase in approximately 300 of the company’s small or underperforming stores.

Monro says its fiscal first quarter financial performance includes the results of its divested wholesale and tire distribution assets through June 16th, which is before it completed the sale of its Tires Now distribution centers to ATD.

According to the financial report, retail comparable store sales increased approximately 5% for tires and front end/shocks, 2% for brakes and 1% for maintenance services compared to the prior year period. Retail comparable store sales decreased approximately 2% for alignments compared to the prior year period. Gross margin decreased 180 basis points to 35% in the first quarter of fiscal 2023 from 36.8% in the prior year period. The decrease was primarily due to an incremental investment in technician headcount and wages to support current and future sales growth. The company says it estimates that this incremental investment impacted gross margin by 200 basis points in the first quarter. In addition, lower than expected comparable store sales growth also resulted in higher fixed distribution and occupancy costs as a percentage of sales.

Monro says material costs as a percentage of sales improved year over year driven by higher selling prices and a mix shift towards higher margin service categories.

Total operating expenses for the first quarter of fiscal 2023 were $95.9 million, or 27.4% of sales, as compared to $98 million, or 28.7% of sales in the prior year period. The year-over-year decrease was primarily due to a $1.2 million gain on the sale of the company’s wholesale locations and tire distribution assets, net of closing costs and costs associated with the closing of a related warehouse in the first quarter of fiscal 2023 and $3.9 million in one-time litigation settlement costs in the prior year period.

Operating income for the first quarter of fiscal 2023 was $26.3 million, or 7.5% of sales, as compared to $27.9 million, or 8.2% of sales in the prior year period. Income tax expense in the first quarter of fiscal 2023 was $8.1 million, or an effective tax rate of 39.6%, compared to $5.3 million, or an effective tax rate of 25.4% in the prior year period. The increase in effective tax rate was primarily due to discrete tax impacts related to the divestiture of the company’s wholesale tire locations and tire distribution operations as well as the revaluation of deferred tax balances due to changes because of the divestiture.

Outlook

Monro says it is not providing fiscal 2023 financial guidance at this time but will provide perspective on its outlook for fiscal 2023 during its earnings conference call.