With a headline beat, and reiteration of the year, so far it looks like DRVN guided down enough on the ugly print last Q. Its working on issues in the US car wash segment. It is closing 29 money losing stores, it changed up leadership, and changed team structures and priorities. The segment saw EBITDA margins fall to 17% from 34% a year ago. At the same time the company is still delivering growth, albeit with weak margin flow through near-term and slowing trends. Revenue was up 12% with comps up 6.4%. We’re seeing that moderate slowdown in just about all auto aftermarket businesses we track as the consumer defers maintenance as much as it can with the wallet under pressure. DRVN again highlighted the Car Wash weakness on risk of the discretionary nature of the business with a consumer under pressure, as well as the hit from competitive entry. The maintenance segment, and particularly Take5 Oil Change continue to lead the segment performance, with Take5 delivering 14% comps. In many ways the performance and strength of Take5 that the company highlighted on its Investor Day a few weeks back makes us more bullish on VVV and the growth opportunity ahead of Valvoline Instant Oil Change. Management is saying all the right things, and appears to realize the market has drastically altered its view of the value of the company and its business units. Now it has to execute, improve profitability and returns, while still driving the growth story forward. We think the company will succeed, but given the market dynamics and elevated rates with slowing near term trends, we have adjusted our multiples down moderately and revised the model to bake in the building discretionary spending pressure we are seeing for the US consumer. Underlying trends within the business are moderately slowing, high leverage is working against it from an equity value perspective. This company just needs to hit numbers for a few quarters and keep the long-term growth story going. Near term things are not likely to get much better, though also not likely to get much worse. On the longer-term unit and comp growth story here we think you have a path to a triple or better for the stock. Best Idea Long. See Elevator Pitch and SIGMA analysis below.
