We’re removing MNRO from our Best Ideas Short list. We added the name to the list back in late May as we thought depressed miles driven trends would pressure the company’s sales leading to a big earnings miss. The fundamental call was right, and in a huge up retail market (XRT +130%) MNRO was down 2% since we went negative. As we review the setup today, this name is no longer a short.
On the bear side, the company is still struggling through a turnaround with recent high turnover in management, and despite very ugly earnings trends the company is still carrying a massive multiple at 32x street NTM earnings expectations; expectations which we think are too high. As we look at the model, we’re still about 13% below the street, coming in at $1.67 for fiscal 2022 (Mar) vs the street at $1.93 (which should come down some).
On the bull side are two main factors. One is the rate of change is improving, we kept this short on recently as we had high confidence comp trends were weakening from the rate signaled on the 2Q earnings call. However, now the data we see on miles driven and online interest is clearly improving. The company signaled this as well noting +3% comps in January. So comps are accelerating as we near much easier compares. That does not make for a Best Idea Short regardless of valuation. And this is probably why the market is shrugging off this big miss. The second factor is activism. For MNRO, the auto maintenance space has long been one where PE likes to be active, and the board has been getting pushed by an activist to start making some changes. This likely puts some floor on the downside for the stock.
As time goes on and we near more difficult compares perhaps we revisit this name short side, especially as we rotate out of Macro Quad2.
