Monro delivered sales inline with a headline EPS beat from cost reductions and store reductions. Perhaps not a good sign when a rollup is beating from help from closing stores, but cutting back is the right move. As for other cost reductions, the company is operating without previous key management positions and has apparently cut costs elsewhere too. The trend in comps is notable, March was down 20%, then April down 41%, May down 24%, June down 14%, July down 12%. When asked about why its sales aren’t recovering to the levels auto parts retail has seen, management said:
“one of the metrics we really look at pretty closely and monitor pretty closely in our business since the onset of this pandemic's been vehicle miles traveled, looking at that as well as gasoline consumption, et cetera. And our performance, since the onset of the crisis, is really correlated really pretty positively with those metrics.”
That sales trend vs miles was also likely slightly aided by stimulus. Auto parts retail has a potentially highly volatile DIY business, that would benefit from time at home and stimulus/unemployment benefits. This is the exact reason MNRO made it onto our best idea short list, and the others in Auto didn’t. The question analysts might then want to ask themselves, is what keeps auto parts retail demand from gravitating towards the general miles driven trend, and will miles driven recover to pre-covid levels? With the recovery in miles driven stalling in the data we are watching (note on seasonality, June/July are generally the peak driving months), and potentially waning stimulus benefit, we think stagnant or slowing comps in the coming months for MNRO is a real possibility.
The other interesting point for MNRO came on discussions on category trends. For the last 2 quarters, comps in brakes at Monro lagged tires by just 300bps, this quarter brakes lagged by 2700bps! When asked why, the CEO stated:
“back in our Q4, January, February, we had maybe undersized performance as an industry in tires. That certainly has bounced back into our Q1. Conversely, if you look at brake performance, the peak demand months for our business is usually exiting the winter months. So it puts you in the March, April, May time frames and be able to say that was the peak time frame, where I think we saw maximum COVID impact, number one, with consumer, but, also, we probably had the tightest labor conditions in our stores during that same period of time. So I think if you overlay that macro dynamic with also possibly seeing some share of wallet issues with the consumer, where if you have 2 large ticket items that need to be done on your car, tires and brakes, in many cases, you'll have to choose one of those.”
It's possible to have some shift from one quarter into the other, but it seems odd that would be specific to tires. Brakes underperforming due to high volume months would make sense if comparing the dollar values of tires and brakes, but not comps of tires to itself and brakes to itself. And we sincerely hope that consumers being forced to choose between badly worn tires and badly worn brakes are NOT choosing the tires (unless the tire can’t hold air). What we think is more likely happening is partly what we highlighted in our miles driven deep dive in May, which is if you are driving around with ~40% less traffic, you can generally can get from point A to point B with a lot less use of your breaks. Tires get extra wear from tough stop and go driving as well, but they wear some with every revolution. Brakes wear heavily with heavy breaking in stop and go traffic. The other dynamic likely playing a role is the ability to upsell when operating under Covid protocols. Monro banners are viewed first and foremost as tire retailers, so coming in for tires is when customers get upsold on extra preventative repairs. If you’re not supposed to be near people, and they don’t really want to be near you, there is less opportunity for the “check out how low your brake pads are, you probably want to change those too while you’re at it”. Lastly, consumers are probably less willing to spend on extras in general, the divergence between tires and alignments indicates this (-14% in tires, vs -32% in alignments). Also note that tires are lower margin, as management cited that mix shift as part of the gross margin pressure this quarter.
As for the stock, we think miles driven and underlying vehicle wear will remain pressured and well below pre-covid levels for the foreseeable future, meaning comps and margin mix for MNRO will remain pressured. We’re getting to $1.25 in 2022 (Mar ’22) EPS, and $1.80 in 2023. We’re not sure why this stock should trade at 30x+ mulitples, 20-25x seems aggressive still, but we’ll go with that given the historical premium. That’s a stock around $25-$40 on recovery earnings. The company is also levered 3.5-4.5x depending on your EBITDA. At an EV 10x our current 2022 EBITDA would imply a stock price in the low 30s. Over the longer term we like the pair with VVV long. We think VIOC (approaching half of VVV EBITDA) is a great business with great growth opportunity and solid management, MNRO notably weaker on all parts. VVV is trading at 14x street NTM PE, MNRO at 46x, VVV at 10.5x EBITDA and MNRO at 17x… though we think both have EPS expectations that are high.
