Executive Summary / Key Takeaways

• Monro, Inc. is undergoing a significant strategic transformation under new leadership, focusing on operational excellence, store optimization, and enhanced customer engagement to drive long-term profitability.
• The company successfully closed 145 underperforming stores in Q1 fiscal 2026, a move expected to significantly improve profitability despite a modest reduction in total sales.
• Technological advancements, including the ConfiDrive Digital Courtesy Inspection tool and targeted digital marketing, are proving effective in boosting high-margin service sales and attracting higher-value customers.
• Despite recent consumer demand softness and tariff-related cost pressures, Monro anticipates year-over-year comparable store sales growth and improved adjusted diluted EPS for fiscal 2026, supported by its strategic initiatives.
• Monro maintains a strong financial position with ample liquidity and consistent cash flow generation, enabling it to fund strategic investments and its dividend program.

A New Chapter for Automotive Aftermarket Services

Monro, Inc. (NASDAQ: MNRO), established in 1957, stands as a prominent player in the highly fragmented U.S. automotive undercar repair and tire services market. Operating 1,116 company-owned retail stores and 47 franchised locations across 32 states as of September 27, 2025, Monro has built a durable business model centered on providing essential, non-discretionary services. The industry itself benefits from robust tailwinds: over 280 million vehicles on U.S. roads, vehicle miles traveled returning to pre-COVID levels, and an average vehicle life exceeding 12.5 years. This aging fleet, coupled with increasing vehicle complexity, continues to drive a secular shift from "do-it-yourself" to "do-it-for-me" maintenance and repair, creating a fertile ground for service providers like Monro.

Under the leadership of new President and CEO Peter Fitzsimmons, appointed in March 2025, Monro has embarked on a comprehensive performance improvement plan. This strategic overhaul is designed to refine operations, enhance customer value, and unlock the company's full potential for profitability and shareholder returns. The plan is built upon four key pillars: store optimization, improving customer experience and selling effectiveness, driving profitable customer acquisition and activation, and increasing merchandising productivity while mitigating tariff risks.

Monro's competitive landscape includes major players like Goodyear Tire & Rubber Company (GT), O'Reilly Auto Parts (ORLY), AutoZone (AZO), and Advance Auto Parts (AAP). While competitors like Goodyear leverage global scale and R&D in tire technology, and parts retailers like O'Reilly and AutoZone excel in product variety and distribution efficiency, Monro distinguishes itself as more of a service business than a parts retailer. Its strength lies in a dense, localized network that fosters customer loyalty, operational execution in undercar repairs, and specialized service expertise. Monro's gross profit margin (TTM) of 34.61% and operating profit margin (TTM) of 1.52% reflect its service-oriented model, which, while different from parts-centric rivals, aims for consistent profitability through efficient service delivery.

The company's strategic partnerships, such as the agreement to purchase at least 90% of forecasted tires from American Tire Distributors until 2030, further solidify its supply chain and competitive positioning.

Technological Edge and Operational Refinement

A cornerstone of Monro's strategic transformation is its investment in technology and operational refinement, designed to enhance both customer experience and internal efficiency. The ConfiDrive Digital Courtesy Inspection Process stands out as a core technological differentiator. This digital tool is utilized in stores to conduct thorough vehicle inspections, allowing technicians to present needed maintenance and repairs to customers more effectively through visual aids like pictures. This tangible benefit translates into improved communication, builds trust, and facilitates educational selling. The impact is quantifiable: in the first quarter of fiscal 2026, ConfiDrive contributed to significant sales and unit growth in high-margin service categories, including a notable 26% increase in front-end shocks. In the third quarter of fiscal 2025, while overall traffic was down, the average ticket increased, driven by strong attachment rates in services like batteries, alignments, and ride control, directly attributable to the ConfiDrive process. For investors, ConfiDrive is a critical component of Monro's competitive moat, driving higher average repair orders (ARO), boosting profitability in key service segments, and enhancing customer retention through a transparent and trustworthy service experience.

Beyond ConfiDrive, Monro is actively investing in new technologies and R&D initiatives to modernize its customer engagement and operational efficiency. The company is deploying a wide range of digital marketing tools and customer relationship management (CRM) strategies to target and activate its customer base. Through sophisticated customer segmentation analysis, Monro has identified "highest value customers" who deliver 25 times more profit than its lowest-tier customers. This refined targeting has been rolled out to almost 600 stores, demonstrating superior performance in call volumes, store traffic, sales, and gross profit generation compared to the rest of the chain. The hiring of Tim Ferrell as VP of Marketing in September 2025 underscores the commitment to this digital-first approach. Furthermore, Monro is expanding its centralized call center, which is already operational in over 700 stores and has shown positive impacts on sales and gross profit, with a full rollout expected by early November 2025. On the merchandising front, new analytical tools for demand and inventory forecasting and pricing are being implemented to optimize product assortment, maintain competitive pricing, and maximize margins. These technological and operational advancements are not merely incremental improvements; they are foundational to Monro's strategy to drive profitable customer acquisition, enhance in-store execution, and ultimately deliver higher adjusted operating income and long-term shareholder value.

Financial Performance and Strategic Momentum

Monro's recent financial performance reflects a company in transition, demonstrating early signs of success from its strategic initiatives while also contending with external pressures. For the second quarter of fiscal 2026, Monro reported sales of $288.9 million, a 4.1% decrease year-over-year, primarily due to the closure of underperforming stores. However, this was partially offset by a 1.1% increase in comparable store sales, marking the third consecutive quarter of positive comparable store sales growth. Adjusted diluted earnings per share for the quarter reached $0.21, an increase from $0.17 in the prior year period.

The gross margin rate expanded by 40 basis points to 35.7%, driven by lower occupancy costs (benefiting from higher comparable store sales and store closures) and improved material margins in service categories. This was partially offset by increased technician labor costs due to wage inflation. Adjusted operating income for Q2 fiscal 2026 was $14 million, up from $12.6 million in the prior year. The company also successfully reduced inventory levels by approximately $11 million, reflecting improved inventory management.

Looking at the broader fiscal year 2025, Monro reported annual revenue of $1.20 billion and a net loss of $5.18 million, impacted by significant store impairment costs of $20.9 million in Q4 fiscal 2025 and consulting expenses for the operational improvement plan. Despite these challenges, the company generated robust annual operating cash flow of $131.91 million and free cash flow of $105.55 million, underscoring its underlying cash-generating capability.

The company's liquidity remains strong, with $10.5 million in cash and equivalents and $409.9 million available under its $500 million Credit Facility as of September 27, 2025.

While a working capital deficit of $268.4 million exists due to extended supplier payment terms, Monro remains in compliance with all debt covenants. The company's dividend of $0.28 per share quarterly is supported by its strong operating cash flow.

Outlook, Risks, and the Path Forward

Monro's outlook for fiscal 2026 is anchored in the continued execution of its performance improvement plan. The company anticipates year-over-year comparable store sales growth, driven by strategic initiatives and potential tariff-related price adjustments. The store optimization plan, which involved closing 145 underperforming stores, is expected to reduce total sales by approximately $45 million in fiscal 2026 but will significantly enhance profitability. Gross margin for the full fiscal year 2026 is projected to be consistent with fiscal 2025, with management expecting higher gross margins in the second half of the year as benefits from store closures and operational improvements materialize. This is despite anticipated baseline cost inflation and exposure to tariff-related cost increases, which the company is actively working to mitigate through supplier negotiations and potential consumer price adjustments. Monro expects to deliver a year-over-year improvement in adjusted diluted EPS for fiscal 2026 and projects capital expenditures between $25 million and $35 million for facility and system upgrades.

While management acknowledges some recent softness in consumer demand, particularly among lower-income segments, and a preliminary October comparable store sales decline of 2%, they express confidence in achieving positive comparable store sales for the full fiscal year. This confidence stems from the early positive results seen in stores where digital marketing and call center initiatives have been implemented. The economic environment, with potential downward pressure on new and used car sales, is viewed as favorable for the automotive aftermarket service sector, as consumers are likely to extend the life of their existing vehicles.

However, Monro faces several pertinent risks. The ongoing uncertainty surrounding tariffs could lead to higher material costs across most product categories, potentially pressing margins if price adjustments cannot fully offset these increases. Competitive pressures, particularly from larger players with extensive digital capabilities or diversified product offerings, could impact market share. The company is also exposed to litigation, economic downturns, geopolitical instability, seasonality, and the evolving landscape of automotive technologies, including electric vehicle (EV) adoption. Changes in interest rates also pose a risk, with a 100 basis point change in SOFR potentially impacting annual interest expense by approximately $0.6 million. Monro's ability to attract and retain skilled technicians amidst wage inflation also remains a key operational challenge.

Conclusion

Monro, Inc. is at a pivotal juncture, actively transforming its operations to capitalize on its foundational strengths and favorable industry trends. The strategic decision to optimize its store portfolio, coupled with significant investments in digital customer engagement and advanced merchandising tools, positions the company for a return to profitable growth. While macroeconomic headwinds, particularly consumer softness and tariff impacts, present near-term challenges, Monro's management is demonstrating a clear roadmap to enhance operational efficiency and drive value. The successful implementation of initiatives like ConfiDrive and targeted marketing, alongside a disciplined approach to cost control and capital allocation, underpins the expectation for improved financial performance in fiscal 2026. For discerning investors, Monro represents a compelling opportunity to participate in a revitalized automotive aftermarket leader poised for long-term value creation through strategic refinement and technological leverage.