EV Adoption Will Undermine Profitability Despite Store Closures

Key Takeaways

• Shifting consumer trends, technology advances, and improved vehicle reliability are structurally reducing Monro's service volumes, threatening long-term revenue and sales growth.
  
• Rising labor costs and intensifying competition from new disruptors are compressing margins and challenging Monro's profit sustainability.
  
• Store closures and operational upgrades are streamlining costs, enhancing sales growth, and positioning Monro for improved profitability and long-term market share gains.

Catalysts

Engages in the operation of retail tire and automotive repair stores in the United States.

• The accelerating adoption of electric vehicles, which have fewer maintenance needs relative to traditional internal combustion vehicles, will reduce demand for core services such as oil changes and engine repairs, ultimately creating lasting pressure on Monro's revenue growth opportunity as the vehicle mix shifts.
  
• Persistent improvements in vehicle quality and reliability are reducing the frequency of required servicing, resulting in fewer customer visits and a structurally lower same-store sales base, which erodes long-term topline growth and weakens Monro's sales trajectory across its network.
  
• The ongoing rise of ride-hailing, car-sharing, and urban mobility options decreases individual vehicle ownership, directly shrinking the addressable market for traditional brick-and-mortar service models like Monro, which in turn reduces volumes and increases unit cost pressure on earnings.
  
• Technician wage inflation and industry-wide labor shortages continue to drive up operating costs, as evidenced by a 170 basis point year-over-year increase in technician labor expense, leading to long-term gross margin compression and challenging Monro's ability to sustain profit growth.
  
• Increased competition from both national chains and online/mobile automotive service disruptors is likely to intensify pricing pressures and further commoditize Monro's offerings, pressuring market share and resulting in further gross margin and net margin deterioration over time.

Monro Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Monro compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Monro's revenue will decrease by 0.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -1.7% today to 6.6% in 3 years time.
• The bearish analysts expect earnings to reach $80.4 million (and earnings per share of $2.6) by about August 2028, up from $-20.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.1x on those 2028 earnings, up from -25.2x today. This future PE is lower than the current PE for the US Specialty Retail industry at 18.5x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.97%, as per the Simply Wall St company report.

Monro Future Earnings Per Share Growth

Risks

• Monro has implemented a targeted program to close 145 underperforming stores, which is expected to improve profitability by eliminating low-margin operations, reducing SG&A and occupancy costs, and focusing resources on higher-performing locations, potentially supporting operating margin and earnings growth over time.
  
• The company's operational improvement plan, which includes enhanced merchandising, focused digital marketing strategies, and improved customer targeting, is already yielding positive comparable store sales growth for six consecutive months and driving up average revenue per order, suggesting potential for continued revenue expansion.
  
• Investment in technology such as the ConfiDrive Digital Courtesy inspection process and improved appointment scheduling is driving higher sales in high-margin service categories like brakes, shocks, batteries, and maintenance, and may support long-term margin and revenue growth by deepening customer relationships and increasing average spend.
  
• Monro maintains a strong financial position with low net bank debt, ample credit availability, consistent dividend payments, and positive cash flow expected from the divestiture of owned real estate, providing financial flexibility for reinvestment and stability for shareholders, which could underpin share price resilience or appreciation.
  
• Management is actively leveraging long-term industry trends, such as the increasing complexity of vehicles and consumer shift toward professional automotive maintenance, and is seeing early success in recapturing sales from store closures at nearby locations, which may bolster both long-term revenue and market share despite near-term disruptions.

Valuation

• The assumed bearish price target for Monro is $14.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Monro's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $19.0, and the most bearish reporting a price target of just $14.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $1.2 billion, earnings will come to $80.4 million, and it would be trading on a PE ratio of 7.1x, assuming you use a discount rate of 11.0%.
• Given the current share price of $17.18, the bearish analyst price target of $14.0 is 22.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.