MNRO | Perpetual Underperformer At A Premium

MNRO has been a Best Idea Short since mid-summer 2022 around $48.  The crux of our call is that this is the worst house on a good block (we’re long auto maintenance services with long VVV, DRVN, and more recently MCW, short MNRO).  MNRO is still feeling the hangover of its period as a financial engineering rollup when it overpaid for poor quality stores, and underinvested in the core.  Now it has to invest in operations and talent while significantly underperforming the sales trends of the competition.  This quarter supported our bearish view, as MNRO printed a big headline EPS miss with revenues slightly ahead, but margins missing big with both technician labor inflation/investment and higher marketing spend to drive sales.  Other auto maintenance service names like VVV and DRVN are putting up solid double digit sales growth trends and MNRO is struggling to do 3 to 4% comps while spending up to try to drive demand.  Management thinks this profit pressure is isolated to the fiscal 4Q just reported, but we’d caution that the trade down risk and consumer spending pressure will continue at the same time we have continued wage inflation in the MNRO labor pool, so we suspect profit pressure to rear its head again here in FY 2024.  Management is highlighting the (slowing) success in its underperforming stores investment campaign, with those store comping 7% this Q, but it is clearly doing nothing for the earnings/profitability trend with margins down 140bps this year.  The company announced a recapitalization to eliminate its C class preferred stock that has board power.  That’s likely a net positive on strategic/financial optionality, but means almost nothing to underlying earnings trend of the business.  FY2024 (Mar ’24) earnings estimates have come down from ~$2.10/sh last summer to $1.80 into this print, and likely march lower yet again.  For some reason the stock still holds a ~30x P/E on those falling estimates despite being nearly 3x levered.  That excessive premium is probably from the continued bull case that someone in private equity might want to buy this, but we think that’s overhyped.  We’re coming in around $1.50 in EPS and think this stock is fully valued around the low to mid 30s.  We’ll take the selloff today but we are still short this as we think it’s a share loser, with weak growth and labor cost pressure, high leverage and a high multiple.