Monro Muffler Brake: Smooth ride on a bumpy road

Lynne Heitman | Sep 30, 2008 9:31am EDT | Comment

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Gas prices are at record highs, no one can get any credit, and the housing market has collapsed, taking with it some of the most venerable names on Wall Street and anyone’s desire to go out and buy a new Escalade. That’s grim news for those in the business of selling new cars, but great news for companies such as Monro Muffler Brake (Nasdaq:MNRO), which are in the business of keeping the old ones in good repair.

Monro Muffler Brake, headquartered in Rochester, N.Y., provides automotive undercar repair and tire services in the United States. It operates over 700 company-owned stores in 17 primarily northeastern states under the brands Monro Muffler Brake and Service, Mr. Tire and Tread Quarters Discount Tire. Along with its two main competitors, Midas and Pep Boys, Monro is part of the $158 billion “Do-It-For-Me” (DIFM) U.S. automotive aftermarket industry. These companies provide brake, tire, exhaust and other maintenance services to the 77.5% of us who would rather not spend Saturday afternoons replacing our oil filters and rotating our tires.

The DIFM segment has shown an average annual growth rate of 3% from 1996 to 2006, but is poised to get a big boost from the dramatic negative forces at play in the U.S. economy. Families that can’t afford to buy groceries or pay mortgages are disinclined to go car shopping. The inevitable result is an increasing number of aging cars on the road with high mileage and a need for maintenance and parts. Auto sales are at a 16-year low and 56% of all U.S. cars on the road today are at least eight years old. Add the increasing complexity of vehicles, which discourages the DIY crowd, and you have a real opportunity for an automotive service provider with a solid plan.

The company-owned and operated model offers fixed cost leverage and pricing power. It also provides the opportunity for centralized purchasing and distribution and the efficient use of customer databases for marketing. The company also has a plan for growth that includes expansion of product offerings, new store openings in existing markets, and a continuation of a successful acquisition strategy. Monro has made nine acquisitions over the past six years, adding 141 stores and $155 million in revenue. The three acquisitions since July 2007 are all expected to break even within 12 months of the purchase.

But Monro’s best strategic moves of late have been bigger and more frequent price increases, which customers have accepted in the face of the inflationary market. That it has been able to sustain these increases has been important in the face of its own rising materials, oil, and tires costs. Price increases were a strong driver in Monro’s successful first quarter of fiscal 2009 in which it reported record revenues of $120.4 million, 11.8% better than the first quarter of 2008. Comparable store sales were up 5.6% on an increase in store traffic of 2.5%. Net income for the quarter was $7.8 million compared with $8.2 million for the prior-year period, but earnings per share of $0.39 were up 8.3% from $0.36, and came in higher than analysts’ expectations.

As long as the company continues to execute its operating strategy, it will continue to benefit from the growing army of consumers driving older vehicles, especially under today’s market conditions. A slow economy should also fuel Monro’s acquisition strategy, which is based on the philosophy of “strong-eating-the-weak.” With fewer competitors and better market coverage, Monro Muffler Brake is ready for a spin around the block.