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Coverage Initiation – Monro Muffler Brake, Inc.
Headquartered in Rochester, New York, Monro Muffler Brake, Inc. (MNRO) is a chain of 803 company-operated stores (as of March 31, 2012), three franchised locations, and 14 dealer-operated stores employing over 5,100 people. The company provides automotive undercar repair and tire services in all of the Mid-Atlantic and New England states, as well as portions of the Great Lakes, Midwest, and Southeast. Stores primarily operate under the names “Monro Muffler Brake & Service,” “Tread Quarters Discount Tire,” “Mr. Tire,” “Autotire Car Care Center,” and “Tire Warehouse,” and are typically situated in highly-visible locations in suburban areas and small towns, as well as in major metropolitan areas.
The predecessor to the company was founded by Charles J. August in 1957 as a Midas Muffler franchise in Rochester, New York, specializing in mufflers and exhaust systems. Frustrated by the company’s mufflers-only business model, Mr. August ended his affiliation with Midas and launched a new company with his brother, Burton S. August, and Sheldon Lane. In 1966, Monro Muffler, named after Monroe County in New York, was born and began offering a full line of undercar repair services. In 1984, an investor group led by Peter J. Solomon and Donald Glickman purchased a controlling interest in the company, and used the money to expand the business. Messrs. Solomon and Glickman remain on the Board of Directors, and own 4.2% and 1.3%, respectively, of the common stock. Mr. Solomon also owns 100% of the firm’s Class C Preferred Stock.
Monro Muffler Brake provides a broad range of services for passenger cars, light trucks and vans, including brakes, mufflers, exhaust systems, steering, drive train, suspension, and wheel alignment. It also provides other products and services, like tires and routine maintenance services, including state inspections. The firm typically does not perform under-the-hood repair services, except for oil change services, various “flush and fill” services, and some minor tune-up services. The Company does not sell parts or accessories to the do-it-yourself market. Fiscal 2012 (fiscal year ended the last Saturday in March of 2012) sales breakdown was as follows: brakes, 18%; exhaust, 5%; steering, 10%; tires, 39%; and maintenance, 28%.
Monro has experienced significant growth in recent years due to acquisitions and, to a lesser extent, the opening of new stores. Since 2008, sales have grown at an average annual rate of about 12%, with earnings per share growing 26%. In the same span, over 80 stores have opened and annual comparable store sales growth has averaged roughly 4.25%. However, overall firm profitability could be reduced if acquired or new stores do not meet management’s expectations.
In fiscal 2013, Monro plans to add approximately six new stores and continue its aggressive acquisition strategy. Consistent with this approach, the company has already signed a definitive asset purchase agreement to acquire 18 retail tire and automotive repair stores located in North Carolina from Colony Tire Corporation and purchased 20 retail tire and automotive repair stores located in Virginia from Kramer Tire Co. As part of the Kramer acquisition, two heavy truck tire and truck repair stores, two wholesale operations, and a retread facility also located in Virginia were acquired. The total purchase price of these acquisitions is approximately $50 million.
Monro’s operating strategy is to provide its customers with a wide range of dependable, high-quality automotive services at a competitive price by emphasizing its products and services; customer service; advertising and co-branding initiatives; centralized control; and comprehensive employee training.
The industry in which the company operates is generally highly competitive and fragmented, with the number, size and strength of competitors varying widely from region to region. Monro believes that competition within the industry is based on customer service and reputation, store location, name awareness, and price. Its primary competitors include national and regional undercar, tire specialty and general automotive service chains, both franchised and company-operated; car dealerships, mass merchandisers operating service centers; and, to a lesser extent, gas stations, independent garages and Internet tire sellers.
The automotive repair industry is subject to fluctuations in the general economy and during a downturn in the economy, customers may defer or forego vehicle maintenance or repair. Conversely, during periods of good economic conditions, consumers may decide to purchase new vehicles rather than have their older vehicles serviced. Should a significant reduction in the number of miles driven by automobile owners occur, it would likely have an adverse effect on the demand for Monro’s services (e.g. when the retail cost of gasoline increases, the number of automobile miles typically decreases, resulting in less frequent service intervals and fewer repairs). Consequently, management believes that the flat comparable store sales for fiscal 2012 resulted mainly from the continued weak U.S. economy.
Moreover, Monro depends on close relationships with its vendors for parts, tires and supplies and for its ability to purchase products at competitive prices and terms, which result from the volume of the firm’s purchases from these vendors. Further, the existence of alternative sources for most of the products Monro sells or uses at its stores limits the dependency on any one supplier. Also, a number of products it depends on (e.g. brake parts, tires, oil filters) are produced in foreign markets, which carry additional risks.
Another risk facing this automobile services provider is the continued developments in automotive technology. Automotive manufacturers are producing cars that last longer and require service and maintenance at less frequent intervals in certain cases. Quality improvement of manufacturers’ original equipment parts has in the past reduced, and may in the future further hamper, demand for its products and services, adversely affecting the company’s sales. Longer and more comprehensive warranty or service programs offered by automobile manufacturers and other third parties also could adversely affect the demand for Monro’s services. In addition, advances in automotive technology continue to require the firm to incur additional costs to update its diagnostic capabilities and technical training programs.
Subscribers interested in learning more about this automotive services company are advised to consult Value Line’s quarterly reports for Monro Muffler Brake, as well as any supplemental reports and relevant articles that may arise as important news comes to light.
The author did not have positions in any of the companies mentioned at the time this article was written.