Morno, Inc. saw strong tire sales in its third quarter, which ended Dec. 24, 2022, as well as an increase in comparable store sales in its small or underperforming stores. Yet, sales for the third quarter decreased 1.9% compared to the third quarter last year, Monro reported in its financial results at the end of January. The company also announced it has executed a definitive asset purchase agreement to acquire four additional stores in Iowa and one additional store in Illinois. These locations are expected to add approximately $6 million in annualized sales, Monro said, noting the acquisition is expected to close in the fourth quarter of fiscal 2023.
“Driven by strength in tires and a comparable store sales increase of approximately 12% in our small or underperforming stores, we delivered mid-single digit comparative store sales growth of approximately 6% in the third quarter,” said Mike Broderick, president and CEO. “Given broad-based inflationary pressures on the consumer, we saw customers continue to trade down to lower-priced tire options and defer vehicle maintenance in some of our key service categories. Repositioning our tire assortment ahead of the winter selling season to give our customers the right tire at the right price allowed us to drive additional customer traffic to our stores, which resulted in tire unit growth and outperformance in tire units versus the industry in the third quarter. In line with our strategy to develop a long-term relationship with our customers, we chose not to fully pass-through parts inflation to an already stretched consumer. While a higher sales mix of tires versus service, customer trade downs to opening price point tires, our investments in price, and continued labor cost pressure impacted our gross margin, prudent cost control in the third quarter allowed us to leverage operating expenses on mid-single digit growth in comparable store sales. Encouragingly, our sales momentum has continued into fiscal January, with our preliminary comparable store sales up approximately 8%.”
Broderick continued, “As we continue to drive our business toward consistently delivering on our mid-single digit comparable store sales growth expectations, the customer-focused initiatives we’ve recently implemented will allow us to fulfill our commitment to maintaining a more balanced approach between the tire and higher-margin service categories. We believe this will enable us to leverage our cost structure to deliver enhanced profitability, as we drive customer traffic to our stores, capture market share and position Monro as an even stronger competitor in every market we serve.”
Sales for the third quarter of the fiscal year ending March 25, 2023, decreased 1.9% to $335.2 million, as compared to $341.8 million for the third quarter of the fiscal year that ended March 26, 2022. Monro said the total sales decline of $6.6 million was due to the divestiture of the company’s wholesale tire and distribution assets in the first quarter of fiscal 2023. Sales for these divested assets were $27.7 million in the third quarter of fiscal 2022. Comparable store sales increased 5.6% for the period, driven by an approximate 12% comparable store sales increase in approximately 300 of the company’s small or underperforming stores, Monro said. This compares to an increase in comparable store sales of 13.8% in the prior year period. Sales from new stores increased by $6.1 million, primarily from recent acquisitions. When adjusted for one additional selling day in the current year quarter due to a shift in timing from the previous Christmas holiday, comparable store sales increased by 4.4%.
Comparable store sales, adjusted for days, increased approximately 8% for tires and 7% for maintenance services compared to the prior year period. Comparable store sales, adjusted for days, decreased approximately 5% for brakes, alignments and front end/shocks, the company said.
Monro’s gross margin decreased 150 basis points to 33.8% in the third quarter of fiscal 2023 from 35.3% in the prior year period. The company said the decrease was primarily due to a higher mix of tire sales in the company’s retail locations, customer trading down to opening price point tires, as well as parts inflation that the company intentionally did not fully pass through to consumers. Additionally, incremental investments in technician labor and wages to support current and future topline growth increased labor costs by 80 basis points from the prior year. These increases more than offset the benefits to gross margin from the divestiture of the company’s wholesale tire and distribution assets.
Total operating expenses for the third quarter of fiscal 2023 were $89.6 million, or 26.7% of sales, as compared to $93.1 million, or 27.3% of sales in the prior year period. The decrease as a percentage of sales was principally due to prudent cost control which allowed the company to leverage operating expenses on mid-single-digit comparable store sales growth, Monro said.
Operating income for the third quarter of fiscal 2023 was $23.8 million, or 7.1% of sales, as compared to $27.4 million, or 8.0% of sales in the prior year period. Monro said its interest expense was $5.9 million for the third quarter of fiscal 2023, as compared to $5.7 million for the third quarter of fiscal 2022, principally due to higher year-over-year interest rates.
Income tax expense in the third quarter of fiscal 2023 was $5 million, or an effective tax rate of 27.6%, compared to $5.5 million, or an effective tax rate of 25.3% in the prior year period. The increase in the effective tax rate was due to a higher discrete tax impact related to share-based awards as well as other state income tax impacts from the divestiture of the company’s wholesale and tire distribution assets. Monro said net income for the third quarter of fiscal 2023 was $13 million, as compared to $16.3 million in the same period of the prior year.
During the third quarter of fiscal 2023, the company opened one store and closed two stores. Monro ended the quarter with 1,296 company-operated stores and 79 franchised locations
First Nine Months Results
For the current nine-month period, Monro said sales decreased 1.6% to $1,014.5 million from $1,031.3 million in the same period of the prior year, Monro said. Comparable store sales increased 2.3%, and 2.0% when adjusted for one more selling day due to the Christmas holiday shift, compared to an increase of 20.3% in the prior year period. Comparable store sales at retail locations increased by 3.2%, compared to an increase of 22.2% in the prior year period.
The gross margin for the nine-month period was 34.7%, compared to 36.6% in the prior year period. Operating income was 7.3% of sales, compared to 8.7% in the prior year period, Monro reported. Net income for the first nine months of fiscal 2023 was $38.6 million, or $1.17 per diluted share, as compared to $53.0 million, or $1.56 per diluted share in the prior year period.
During the nine months of fiscal 2023, the company said it generated record operating cash flow of approximately $171 million. As of December 24, 2022, the company had cash and cash equivalents of approximately $13 million and availability on its revolving credit facility of approximately $440 million.