ROCHESTER, N.Y. — Monro Inc.'s strategy to improve underperforming stores in its network paid off, but overall store sales were essentially flat during the company's first fiscal quarter, due in part to softening consumer demand.
Net income for the quarter, ended June 25, dropped 20.4% to $12.5 million, despite a 2.3% increase in sales to $349.5 million, compared with the year-ago quarter. Operating income fell 6% to $26.3 million, or 7.5% of sales, as compared to $27.9 million, or 8.2% of sales in the prior-year period.
The fiscal first-quarter results included Monro's wholesale and tire distribution assets which it sold to American Tire Distributors (ATD) on June 16 for a total transaction value of $102 million. The two companies entered into a supply agreement which provides for tire distribution directly to Monro's stores.
"We are pleased that our partnership with ATD is off to a great start, giving us much better availability of tires, quicker delivery and better pricing. Aside from the cash flow generated from this transaction, it has sharpened our focus on our retail store operations. We will concentrate all of our energy and resources on our core strength as a retailer," Monro President and CEO Mike Broderick said.
During the fiscal first quarter, Monro opened three stores and closed four, ending the period with 1,303 company-operated stores and 80 franchised locations.
Comparable store sales increased 0.4% for the period — compared to an increase of 34.5% in the prior-year period.
Comparable store sales increased 2.8% in the company's retail locations, driven by a 15% comparable store sales increase in approximately 300 of Monro's small or underperforming stores.
Underperforming stores represented about a quarter of the overall store base, Broderick said. He said the first-quarter results show its strategy of improved technician staffing levels and training is working.
The other stores experienced soft consumer demand, beginning in June, partly due to inflationary pressures and higher fuel prices.
Comparable store sales increased about 5% for tires and front end/shocks, 2% for brakes and 1% for maintenance services, compared with the year-ago period; store sales decreased about 2% for alignments.
Gross margin decreased 180 basis points to 35% in the first quarter from 36.8% in the year-ago period. The decrease was primarily due to an incremental investment in technician headcount and wages to support current and future sales growth, Monro said.
Total operating expenses for the first quarter were $95.9 million, or 27.4% of sales, as compared to $98 million, or 28.7% of sales, in the prior-year period. The year-over-year decrease was primarily due to a $1.2 million gain on the sale of the Monro's wholesale locations and tire distribution assets and costs associated with the closing of a related warehouse and $3.9 million in one-time litigation settlement costs in the prior-year period.
"Our first-quarter results demonstrate clear progress in our strategy to improve our small or underperforming stores through our staffing initiatives. Our retail locations delivered comp store sales growth of approximately 3%, driven by outsized comp store sales growth of 15% in approximately 300 small or underperforming stores," Broderick said.
"This acceleration is a direct result of the labor capacity improvements we've made to meet customer demand. We are now in the final stages of our technician hiring efforts. Operational improvements in our in-store execution represent our greatest opportunity and are in our control. Properly training our technicians, re-allocating resources between front-of-shop and back-of-shop investments and delivering an outstanding guest experience will be critical to meeting our mid-single digit comp store sales growth expectations," he said.
"With our staffing initiatives almost complete, we are carefully managing expenses in the business which we expect to drive profitability. As we continue to capture productivity improvements from our technician staffing investments, we expect to deliver better results as fiscal 2023 progresses."
Over the last 12 months, Monro said it has increased staffing levels in its stores to meet needs of customers and now it is in the final stages of "right-sizing" store labor.
"These investments in additional head count and inflationary wage pressures, increased our technician labor cost as a percentage of sales in the quarter by 200 basis points versus the same period last year. This was a 50-basis points sequential improvement resulting from an increase in sales per tech hour and a 9% reduction in overtime hours," Broderick said.
He added that the company will continue focusing on training and reallocating resources between the front-of-shop and back-of-shop investments to maximize store productivity.
"We are focused on training our new and existing teammates on key in-store processes that drive sales and deliver an outstanding customer experience. These include store scheduling, phone skills, courtesy inspections and becoming our customers' most trusted vehicle advisor."