Monro Results Suggest Improving Automotive Aftermarket Trend

| About: Monro Muffler (MNRO)

In the second fiscal quarter conference call, I quoted Monro Muffler Brake (NASDAQ:MNRO) CEO Rob Gross as saying: “We are happy with the acquisition environment, happy with the Pro Care acquisition, happy sales are no longer negative, and very dissatisfied with the first six months.”

Well, the third quarter (as suggested by Mr. Gross in the fiscal 2Q conference call) did prove the turning point. Monro reported earnings per share (eps) of $0.32, a 19% improvement from the prior year period. Although it was a penny below my forecast. Guidance for the fourth fiscal quarter is for eps of $0.37 to $0.40, while my most recent forecast called for $0.37.

Same-store sales were up 2.9%, ahead of my forecast for 2%, and a pretty dramatic turn from the 1.1% in the second quarter and negative 2.9% in the first. Management also indicated that same-store sales in the first three weeks of January are in the “high single digits.” When commenting on the quarter (in the release) Mr. Gross said:

As expected, consumers began to return to more normalized spending patterns after several soft quarters and we were pleased that our comparable store sales recovered, highlighted by a 6.5% increase in December. Specifically, the major repair purchases, which consumers had deferred earlier in the year due to rising gas prices and general macroeconomic concerns, rebounded in the quarter. In addition, store traffic and oil changes showed solid increases, which are key indicators of the overall health of our business.

I have not been as big a fan of the “gas price” argument causing deferral in something I consider essentially replacement demand. If we were really seeing so many deferred maintenance purchases, why did the peer group of publicly traded franchised auto retailers report a 3.4% same-store sales improvement in their service and parts segment in the calendar 3Q, and 5.2% same-store sales improvement in calendar 2Q?

I continue to believe increased durability (partially offset by a growing vehicle population) is causing the underlying demand for hard parts to decline. On top of that (and perhaps most importantly), think franchised auto retailers are gaining market share. Having said that, I think Monro is a well run company. And as the market bifurcates (a big word I like to use in place of “divide” so I sound smart), I continue to believe efficient “low tech” operators like Monro will gain share from the less efficient operators.

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