Monro, Inc. (NASDAQ:MNRO) is one of the leading players in the highly fragmented auto aftermarket tire and services industry. With approximately 1,300 stores across 32 states, the company has significant scale that gives it important competitive advantages over smaller players. Monro leverages its scale and financial strength to make critical investments in its business, people, and technology to deliver an outstanding customer experience.

Business Overview

The fundamentals of the auto aftermarket industry remain strong, with an overall growing trend of more than 280 million vehicles in operation, vehicle miles traveled that have recovered to pre-COVID levels, and an average vehicle age of more than 12 years that continues to increase. Furthermore, the increasing complexity of vehicles is driving a shift from do-it-yourself to do-it-for-me, a trend expected to accelerate with future technology advances.

While the non-discretionary nature of Monro's products and services may result in consumers deferring purchases or trading down, they cannot eliminate these purchases altogether. Monro's experienced management team is keenly focused on maximizing efficiencies, including costs, to protect margins during what the company believes to be a temporary period of challenges to its top line.

Tire Dynamics and Company Response

Tires, which represent around 50% of Monro's overall business, are currently providing a temporary yet meaningful negative impact. Strained low- to middle-income consumers are deferring tire purchases in higher margin tiers and disproportionately trading down to tires at opening price points, supported by an oversupply of lower margin tires in the U.S. Additionally, milder weather has contributed to the general tire deferral cycle, leading to fewer U.S. tire replacement units being sold at a lower overall average selling price.

Monro is navigating the tire situation by leveraging the strength of its manufacturer-funded promotions, which has allowed the company to optimize its assortment for improved tire profitability with a higher average selling price per tire. Encouragingly, Monro's tire market shares remain broadly in line with the overall market in its higher margin tiers. The company is also responding to continued consumer trade-down dynamics by accelerating its proportion of opening price point tires.

Initiatives to Offset Weakness in the Tire Market

Monro has recently implemented four initiatives to offset weakness in the tire market:

1. Investment in a digital, tablet-based 32-point courtesy inspection system that presents other needed services to customers, enhancing engagement and trust, and capturing more structured data.

2. A service coupon program offering customers a $50 rebate toward the purchase of additional services with the purchase of one set of brake pads or rotors.

3. A "Buy 3 Tires, Get 1 Free" promotion, allowing the company to sell better quality tires to value-oriented consumers.

4. An oil change offer developed as part of a renewed partnership with Valvoline, where customers can earn cash back on an oil change.

Foundational Progress

Despite the deferral and trade-down cycle that has lasted longer than expected, Monro has expanded its gross margins through tire mix optimization, labor optimization, and productivity improvements. The company remains focused on improving its 300 small or underperforming stores, maintaining a balanced approach between tires and services, and continuously improving the customer experience.

Monro's efforts to optimize inventories by leveraging strong vendor partnerships have resulted in better availability, quality, and cost of parts and tires, improving the company's cash conversion cycle. Its solid financial position, including operating cash flow generation of $125 million in fiscal 2024 and a strong balance sheet, supports capital return to shareholders through a healthy dividend program.

Financials

In the fourth quarter of fiscal 2024, Monro's sales decreased 0.2% year-over-year to $310.1 million, including $24.4 million for the extra week in the current year period. Comparable store sales increased 0.1% on a reported basis and decreased 7.2% when adjusted for the extra week of sales. Gross margin increased 210 basis points compared to the prior year, primarily due to lower technician labor costs and material costs as a percentage of sales, partially offset by higher fixed occupancy costs.

Outlook

For the first quarter of fiscal 2025, Monro expects to deliver approximately break-even adjusted diluted earnings per share if current top-line trends continue, with preliminary comparable store sales down approximately 12% to date. The company's earnings in fiscal 2025 will largely depend on where comparable store sales land for the full fiscal year, with every 1% change in comps representing about a $0.14 increase or decrease in adjusted diluted earnings per share.

Monro expects to generate at least $100 million of operating cash flow, inclusive of continued working capital reductions, in fiscal 2025. The company plans to spend $25 million to $35 million on capital expenditures in the same period.

Conclusion

Monro's business has long-term durability, and while tires are providing a temporary negative impact, the company is navigating the situation well with its actions. Monro has implemented initiatives to offset weakness in the tire market and has made foundational progress that will enable it to benefit when tire volumes recover. Despite the challenges posed by the current macroeconomic environment, the company's business continues to be well-positioned, and it remains confident in its path to restore gross margins back to pre-COVID levels with double-digit operating margins over the longer term.