Executive Summary / Key Takeaways

• Monro, Inc. is undergoing a significant strategic transformation under new leadership, focused on enhancing operational efficiency and profitability through a targeted performance improvement plan.
• Recent financial performance in fiscal 2025 showed a sales decline (-6.4%) and gross margin pressure (down 50 bps), impacted by lower traffic, fewer selling days, consumer trade-down to lower-margin tires, and increased self-funded promotions, despite gains in technician labor productivity.
• A core element of the improvement plan is the closure of 145 underperforming stores in Q1 fiscal 2026, expected to reduce total sales by approximately $45 million but deliver meaningful profitability gains by shedding fixed costs.
• Key initiatives include improving customer experience (leveraging the ConfiDrive digital inspection process), driving profitable customer acquisition by targeting higher-value segments, and optimizing merchandising (potentially narrowing tire assortment).
• While formal guidance is withheld due to tariff uncertainty, management anticipates year-over-year comparable store sales growth and an improvement in adjusted diluted EPS in fiscal 2026, supported by the improvement plan and expected continued strong operating cash flow generation ($25M-$35M CapEx expected).

Setting the Scene: Monro's Position in a Fragmented Market

Monro, Inc. has established itself as a prominent player in the U.S. retail tire and automotive repair market since its incorporation in 1959. The company's business model centers on providing a comprehensive suite of services, including tire sales and related services, undercar repairs (brakes, exhaust, steering, suspension), and routine maintenance. Operating primarily under well-known regional brands like Monro Auto Service and Tire Centers, Mr. Tire, and Tire Choice, the company has grown its footprint to 1,260 company-operated stores and 47 franchised locations across 32 states as of March 29, 2025.

Historically, Monro's growth has been fueled by a combination of strategic acquisitions and the opening of new locations, aiming to build density in key markets to leverage economies of scale in advertising and supervision. A notable strategic shift occurred in 2022 with the divestiture of its wholesale operations, allowing the company to sharpen its focus on the retail service business. This transition included a significant distribution agreement with American Tire Distributors (ATD), making ATD a primary tire supplier.

The automotive repair industry is highly competitive and fragmented, with rivals ranging from national chains and mass merchandisers to car dealerships and independent garages. Competition is intense, primarily based on price, brand recognition, customer service, and location. Monro's scale provides certain advantages over smaller independent shops, particularly in purchasing power and the ability to invest in technology and training. However, it faces larger, more financially resourced competitors like AutoZone (AZO) and O'Reilly Automotive (ORLY) in the parts segment, Goodyear (GT) in tires and service, and Advance Auto Parts (AAP). While companies like AZO and ORLY excel in parts distribution with higher gross margins (AZO TTM Gross Margin ~53%, ORLY TTM Gross Margin ~51% vs. MNRO TTM Gross Margin ~35%), Monro's integrated service model and extensive physical footprint offer a differentiated value proposition focused on convenience and comprehensive repair solutions. The company's strategy to cluster stores aims to enhance this local market presence and operational efficiency.

Technological Underpinnings and Strategic Initiatives

Monro is increasingly leveraging technology to enhance its operations and customer experience, recognizing its importance in a competitive landscape. While not a developer of groundbreaking automotive technology itself, the company focuses on implementing and utilizing technology to improve service delivery, operational efficiency, and customer engagement.

A key technological differentiator is the ConfiDrive Digital Courtesy Inspection Process. This system aims to standardize and enhance the vehicle inspection process, providing customers with transparent, educational information about their vehicle's needs. The tangible benefit is improved communication and trust with the customer, which management believes drives higher attachment rates for recommended services. While specific, quantifiable metrics on the direct revenue or margin impact of ConfiDrive are not explicitly detailed, management commentary suggests it is "absolutely delivering what I expected" and is contributing to sequential improvements and year-over-year growth in certain service categories like batteries, alignment, and front-end shocks. The strategic intent is clear: to convert inspections into profitable service sales through enhanced customer understanding and confidence.

Beyond customer-facing tools, Monro utilizes data-driven cloud-based store staffing and scheduling software. The stated goal is to optimize technician labor allocation to meet customer demand, thereby improving labor productivity and efficiency. This is a critical operational technology aimed at controlling labor costs, a significant component of the cost structure. Management has noted improvements in technician labor costs as a percentage of sales, partially attributing this to productivity gains from such initiatives.

Furthermore, Monro University, a cloud-based learning curriculum, provides technical and leadership training for employees. This technology is crucial for maintaining a skilled workforce, adapting to evolving automotive technology, and improving overall service quality and consistency across the network. The strategic goal is to build a knowledgeable organization, which directly supports the objective of exceeding guest expectations and improving selling effectiveness.

In the broader competitive context, while companies like AZO and ORLY leverage technology heavily in supply chain and e-commerce, Monro's technology focus appears more centered on in-store operational efficiency and the direct customer service interaction. The ConfiDrive system, in particular, represents an effort to differentiate the in-store service experience, which is a core aspect of Monro's value proposition compared to parts-focused rivals. The "so what" for investors is that these technological investments, if successfully implemented and adopted across the network, have the potential to improve operational leverage, enhance customer loyalty, increase average ticket size through higher attachment rates, and ultimately contribute to margin expansion and profitability growth, helping Monro compete more effectively against rivals with different strengths.

Recent Performance and Financial Health

Fiscal year 2025 presented headwinds for Monro, with total sales decreasing by 6.4% to $1.20 billion. This decline was primarily attributed to a 5.3% decrease in comparable store sales (3.5% adjusted for selling days), driven by lower store traffic and fewer selling days compared to the prior year. Economic pressures continued to influence consumer behavior, leading to lower demand in both tire and higher-margin service categories for much of the year.

Profitability was also pressured. Gross profit as a percentage of sales decreased by 50 basis points to 34.9%. This was mainly due to increased material costs, influenced by a mix shift within tires towards lower-margin offerings as value-oriented consumers traded down, and an increase in self-funded promotions aimed at attracting traffic. Higher fixed occupancy costs, which lost leverage on lower sales, also contributed to the gross margin pressure. These factors were partially offset by improvements in technician labor costs as a percentage of sales, reflecting gains in labor productivity and efficiency.

Operating income saw a significant decline, falling 82.4% year-over-year to $12.6 million. This was heavily impacted by a substantial increase in store impairment charges, totaling $24.4 million in fiscal 2025 compared to $1.9 million in the prior year. Operating, selling, general, and administrative (OSGA) expenses increased by 6.4%, largely driven by these impairment charges, as well as increases in advertising, comparable store costs, and transition/restructuring expenses. The company reported a net loss of $5.2 million for the year, resulting in a diluted loss per common share of $0.22. Adjusted diluted earnings per share, excluding certain non-core items, were $0.48, a decrease from $1.33 in fiscal 2024.

Despite the challenging performance, Monro maintained a solid financial position and demonstrated consistent cash flow generation. The company generated $131.9 million in cash from operations in fiscal 2025, including $43 million from working capital reductions. The working capital deficit increased, influenced by the company's supply chain finance program, which extends payment terms with suppliers. Monro ended the year with $20.8 million in cash and equivalents and $61.3 million outstanding under its Credit Facility. The Credit Facility, recently amended in May 2025 (Fifth Amendment), provides $500 million in borrowing capacity (reduced from $600 million) and includes modified financial covenants to provide increased flexibility through Q1 fiscal 2027. Management believes its liquidity sources are sufficient to meet obligations, fund operations, capital expenditures ($26.4 million in FY25), and pay dividends ($34.9 million in FY25).

Strategic Optimization and Outlook

In response to the recent performance and a comprehensive review, Monro has embarked on a significant performance improvement plan under the leadership of its new President and CEO, Peter D. Fitzsimmons, who assumed the role in March 2025. This plan, developed in consultation with AlixPartners, LLP, targets several key areas to enhance operations, drive profitability, and increase shareholder returns.

A central component is the Store Closure Plan, involving the closure of 145 underperforming stores in the first quarter of fiscal 2026. These stores, identified through performance and demographic data analysis, generated approximately 5% of total sales in fiscal 2025 but failed to meet profitability targets. The strategic rationale is to eliminate the drag from these unprofitable locations and reduce fixed costs, thereby improving overall profitability. While this will reduce total sales by an estimated $45 million in fiscal 2026, the expected benefit to the bottom line is considered meaningful.

Other key pillars of the improvement plan include:

• Improving Customer Experience and Selling Effectiveness: Addressing inconsistencies in service execution and customer pain points to enhance the in-store experience and unlock value in selling processes.
• Driving Profitable Customer Acquisition and Activation: Reallocating marketing spend based on market testing to target higher-value customers, who analysis shows are significantly more profitable.
• Increasing Merchandising Productivity: Evaluating and potentially narrowing the broad tire assortment to simplify the selling process and strengthen partnerships with manufacturers, while also reviewing pricing and promotions across categories.

Looking ahead to fiscal 2026, Monro is not providing formal financial guidance due to uncertainties, particularly regarding potential tariff impacts. However, management has provided key assumptions:

• Expectations for year-over-year comparable store sales growth, driven by the improvement plan and potential tariff-related price increases. Preliminary comps for the first eight weeks of fiscal 2026 were up approximately 7%.
• Total sales will be reduced by the $45 million impact of the store closures.
• Gross margin is expected to remain pressured for the full year due to baseline cost inflation and tariff exposure, though benefits from store closures and operational improvements are anticipated to provide partial offsets.
• The company expects to deliver a year-over-year improvement in adjusted diluted earnings per share.
• Capital expenditures are projected to be between $25 million and $35 million.
• Sufficient operating cash flow is expected to fund capital allocation priorities, including the dividend.

The Credit Facility's Fifth Amendment provides flexibility during this transition period, albeit with increased borrowing costs (225 bps spread over SOFR) and restrictions on dividends (minimum $300M liquidity required) and share repurchases when debt is outstanding.

Risks and Challenges

Despite the strategic plan and anticipated improvements, Monro faces several significant risks and challenges that could impact its ability to execute and achieve its objectives.

The highly competitive nature of the automotive repair industry remains a constant threat. Rivals with greater financial resources or different operating models (like parts retailers with higher margins) can exert pressure on pricing and market share. The planned store closures, while aimed at improving profitability, could also lead to some loss of sales that are not recaptured by nearby locations.

Economic conditions, including persistent inflation and the potential for a slowdown or recession, continue to influence consumer spending and trade-down behavior, particularly impacting demand for tires and higher-margin services. The fluid situation regarding import tariffs poses a direct risk to material costs, and the company's ability to fully offset these increases through pricing adjustments without negatively impacting demand is uncertain.

Dependence on key vendors, notably ATD for a significant portion of tire supply, introduces risk. While an amendment addressed the earnout from the prior divestiture, ATD's bankruptcy filing creates uncertainty regarding the long-term stability and performance of the distribution agreement and the potential need to find alternative suppliers.

Advances in automotive technology, including the increasing complexity of vehicles and the long-term shift towards electric vehicles (EVs), present a structural challenge. EVs require less traditional maintenance (oil changes, exhaust work), potentially reducing demand for some of Monro's core services. The company must adapt its service offerings and ensure its technicians are trained to service newer vehicle technologies, which requires ongoing investment.

Operational risks include the successful execution of the performance improvement plan, particularly the integration of new processes and the impact of store closures on remaining locations and employee morale. Attracting and retaining skilled technicians in a tight labor market remains a challenge that can impact service capacity and labor costs.

Furthermore, the company is exposed to risks related to cybersecurity, as evidenced by a recent incident impacting employee data, which has resulted in litigation and associated costs. While the company has a cybersecurity program and insurance, breaches can damage reputation and incur significant expenses. The multi-class stock structure, which concentrates voting power with the Class C Preferred Stock holders until mandatory conversion (expected 2026), could also limit the influence of common shareholders on corporate matters.

Conclusion

Monro, Inc. is at a critical juncture, actively addressing recent performance challenges through a comprehensive strategic overhaul. The core investment narrative centers on the potential for this performance improvement plan, particularly the targeted closure of underperforming stores and initiatives to enhance customer experience and acquisition, to drive meaningful profitability gains and improve shareholder returns in fiscal 2026 and beyond.

While the past year saw declines in sales and profitability, impacted by external economic factors and internal operational inconsistencies, management's proactive steps signal a commitment to operational excellence and a focus on the most profitable aspects of the business. The company's underlying strengths, including its extensive store network, consistent cash flow generation, and solid financial position (supported by the recently amended Credit Facility), provide a foundation for this turnaround effort.

Key factors for investors to monitor will be the successful execution of the store closure plan, the traction gained from initiatives aimed at improving customer traffic and service category performance (leveraging technology like ConfiDrive), the ability to effectively manage cost pressures from inflation and tariffs, and the competitive response in a dynamic market. While uncertainties remain, particularly regarding the external economic environment and potential tariff impacts, the strategic optimization underway positions Monro to potentially unlock value and improve its financial trajectory, making it a compelling situation to watch for investors focused on operational turnarounds in the automotive aftermarket sector.