Solid Quarter and Guide-Up for Best Idea Long DRVN. Driven Brands with a solid beat of $0.35 vs $0.29 expected with 13.2% comps. The long term growth story here is fully on track. The knock last quarter is that the company didn’t revise up the full year after a strong 1Q, but this time around the company is guiding up the full year with EBITDA to $495mm with comps to be up double digits vs prior +MSD guide on the last quarter. There is definitely some conservatism in the guidance as we see it. This is a new public company that wants to easily beat the street bar, management is wise to keep expectations grounded. This is a Best Idea Long in Auto aftermarket alongside VVV. It’s a massive grower both organically and with an M&A kicker. The company has highlighted the strong performance of its quick service oil change business Take 5. This category is a solid consumer growth segment, and the read here is also bullish for VVV’s Valvoline Instant Oil Change. Take 5 should continue to grow into an industry leader like VIOC and Jiffy Lube. We also like the company’s move to rebrand the US carwash business under the Take 5 banner and look to leverage real estate for both car wash and oil change. We are likely to see organic growth moderate some into the back half as industry demand is seeing some pressure over the near term. But this model is juiced for top line and profit growth over a TREND and TAIL duration, and we think DRVN should do its long term $850mm EBITDA targets two years early. The leverage is high at 4.7x as the company has levered up to accelerate growth, but cash flow growth will mean deleveraging and enhanced equity value appreciation over time. We see DRVN as a double or $60+ over a TAIL duration.
MNRO Beat Street Estimates in 1Q, but Business is Slowing. Best Idea Short. When we went short we flagged that the street had a very low bar on EPS given the company pulled guidance last quarter. That bar gets higher in the second half though at the same time business trends are likely worse. MNRO management noted that July comps had slowed to -1% from +2.8% in its fiscal 1Q. The CEO simply stated the situation MNRO is seeing in the business noting “I mean, the consumer definitely started changing their buying behaviors from May to June and then June into July." Given miles driven trends and our macro outlook, we could see that deterioration continue in the next few months. That’s a problem for the MNRO model and stock. Consensus expectations are for improving business trends in the coming quarters, and the stock seems to think there is no earnings risk at a high 20s PE multiple. This is a business that underinvested while being mismanaged in its rollup days several years back. Now management is trying to reinvest, most notable in technician talent in a tight labor market as demand is slowing. That means big margin risk and lower returns on investment in the coming quarters, something we think the stock is not priced for at these elevated multiples. The model needs MSD comps to work, and industry demand signals suggest we likely won’t see that for a while -- if ever. Management has invested in underperforming stores to get their productivity up, which is leading to good comps in those stores, but it means the prior “good” stores are comping down. Despite the beat, earnings were down 24% YY via gross margins down 188bps. We think this stock is not deserving of the current multiple. Rather we’d argue this no to low growth model should trade around 8x to 10x EBITDA or 15x to 20x PE for a stock price around $25 to $35 vs current $46.70. Best Idea Short.
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