ROCHESTER, N.Y. — Monro Inc. reported drops in operating income for the quarter and nine months ended Dec. 24 based on a variety of issues, including higher sales of lower-margin tires, incremental labor-related cost increases and inflationary issues.
The lower income also came despite a healthy 5.6% increase in comparable store sales in the third quarter.
Third-quarter operating income fell 13.1% to $23.8 million on 1.9% lower sales to $335.2 million, dropping the earnings ratio nearly a full point to 7.1%.
The sales decline was due to the divestiture of the company's wholesale tire and distribution assets in the first quarter of fiscal 2023 to American Tire Distributors Inc., Monro said. The comparable sales figure for these divested assets was $27.7 million in the third quarter of fiscal 2022.
Comparable store sales increased 5.6% for the period, driven by an approximate 12% comparable store sales increase in about 300 of the company's small or "underperforming" stores. Sales from new stores increased $6.1 million, primarily from recent acquisitions.
During the quarter, Monro opened one and closed two stores, resulting in 1,296 company-operated stores and 79 franchised locations.
The company also struck a deal to buy four stores in Iowa and one in Illinois, although management did not identify the businesses being acquired. These locations are expected to add approximately $6 million in annualized sales. This acquisition is expected to close in the fourth quarter of fiscal 2023.
"Driven by strength in tires and a comparable store sales increase of approximately 12% in our small or underperforming stores, we delivered mid-single digit comp store sales growth of approximately 6% in the third quarter," Monro President and CEO Mike Broderick said.
"Given broad-based inflationary pressures on the consumer, we saw customers continue to trade down to lower-priced tire options and defer vehicle maintenance in some of our key service categories. Repositioning our tire assortment ahead of the winter selling season to give our customers the right tire at the right price allowed us to drive additional customer traffic to our stores, which resulted in tire unit growth and outperformance in tire units versus the industry in the third quarter."
In line with Monro's strategy to develop a long-term relationship with its customers, the firm chose not to pass through parts inflation to an already stretched consumer, Broderick added.
The Monro exec also noted that while a higher sales mix of tires versus service, customer trade downs to opening price point tires and continued labor cost pressure impacted the firm's gross margin, prudent cost control in the third quarter helped Monro leverage operating expenses on mid-single-digit growth in comparable store sales.
"Encouragingly," he added, "our sales momentum has continued into fiscal January, with our preliminary comparable store sales up approximately 8%."
Looking forward, Broderick said management believes the "customer-focused initiatives we've recently implemented will allow us to fulfill our commitment to maintain a more balanced approach between tire and higher-margin service categories. We believe this will enable us to leverage our cost structure to deliver enhanced profitability, as we drive customer traffic to our stores, capture market share and position Monro as an even stronger competitor in every market we serve."
For the nine-month period, Monro's operating income fell 17.5% to $74.1 million on 1.6% lower sales of $1.01 billion. Comparable store sales increased 2.3%, which compared unfavorably with a 20.3% increase in the prior year period.
Net income for the nine months fell 27.2% to $38.6 million, or $1.17 per diluted share.
Monro continued executing its share repurchase program in the third quarter, buying back roughly 584,000 shares, increasing the total buy-back so far to 2.2 million shares, valued at approximately $97 million.