Monro, Inc. is one of the leading automotive service providers and tire dealers in the U.S. The company offers a range of maintenance services and tire-related services, catering to approximately five million vehicles annually.
With over 1,300 auto repair shops and tire dealers spread across the United States, Monro has established a significant presence in the automotive service industry. The company is headquartered in Rochester, New York.
Market Conditions
The COVID-19 pandemic posed substantial challenges for Monro, significantly impacting its growth. The lockdowns led to a notable reduction in vehicle miles traveled, which in turn affected the demand for automotive services. Consequently, Monro’s FY21 sales declined by 10.4% compared to FY20.
However, recent data indicate a recovery in market conditions. Vehicle miles traveled have returned to pre-COVID levels as of 2023, which bodes well for Monro’s automotive repair service segment.
Moreover, the U.S. light vehicles in operation have reached record highs, and the average age of these vehicles is now 12.6 years as of January 2024. This suggests a growing demand for maintenance and repair services, given the aging vehicle fleet.
These improving market conditions provide a favorable backdrop for Monro’s business recovery.
Q4 & FY 2024 Earnings
Monro reported its Q4 FY24 and FY24 results on May 23, 2024. It is important to note that FY24 had 368 selling days, compared to 361 selling days in FY23, contributing an extra $24.4 million in sales. FY24 sales were $1.2 billion, reflecting a 3.6% decrease compared to FY23, while Q4 FY24 sales saw a slight decline of 0.2% compared to Q4 FY23.
The decline in sales was primarily attributed to a 2% decrease in comparable store sales in FY24 compared to FY23. Adjusting for the extra week of sales, the decline in comparable store sales was 3.95%.
The gross margin improved to 35.4% in FY24 from 34.4% in FY23, driven by lower material and technician labor costs. Net income for FY24 stood at $37.5 million, a significant improvement from FY23.
However, management has not provided guidance for FY25. It is expected that Monro may see flat sales growth in FY25 due to the ongoing challenges in the sales mix, with low demand for high-margin tires and an oversupply of lower-margin tires.
Valuation – DCF Analysis
To assess Monro’s valuation, a Discounted Cash Flow (DCF) analysis was conducted. The following assumptions were made:
- Flat revenue growth of 1% in FY25 due to the poor sales mix.
- A growth rate of 3.5% for the second year due to improving market conditions.
- A constant growth rate of 3% for the subsequent three years.
For the income margin, slight improvements were assumed:
- Margins of 3.3% and 3.7% for the first two years, higher than the FY24 margin of 3%.
- Margins of 4% for the next three years.
With a discount rate of 9%, the terminal value was calculated to be $428 million. Adding the Free Cash Flow (FCF) value, the equity value amounted to $630.2 million.
Dividing the equity value by the 29.9 million outstanding shares, the fair value of MNRO was estimated to be $21.1 per share. Given the current share price of $24.86, MNRO appears to be overvalued by approximately 15%.
Where to From Here?
Monro faces several challenges, including a high valuation, bearish momentum, and an unfavorable sales mix. Despite these negatives, the company has several positive aspects.
The market conditions have significantly improved since 2020 and continue to get better. Additionally, the aging vehicle fleet in the U.S. suggests sustained demand for automotive services.
While the current valuation appears high, the improved market conditions and the company’s efforts to enhance profitability provide some optimism. It is essential to weigh these positives against the ongoing challenges.
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Dean is a freelance content writer who contributes to various Digital Media Companies and independent websites all over the world. He has over 20 years of financial industry experience, so it’s safe to say he’s well informed.
