What a brutal six months it’s been for Monro. The stock has dropped 25.1% and now trades at $19.11, rattling many shareholders. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy Monro, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Even with the cheaper entry price, we're cautious about Monro. Here are three reasons why MNRO doesn't excite us and a stock we'd rather own.

Why Do We Think Monro Will Underperform?

Started as a single location in Rochester, New York, Monro (NASDAQ:MNRO) provides common auto services such as brake repairs, tire replacements, and oil changes.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Monro’s demand has been shrinking over the last two years as its same-store sales have averaged 3.2% annual declines.

2. Fewer Distribution Channels Limit its Ceiling

With $1.21 billion in revenue over the past 12 months, Monro is a small retailer, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with suppliers.

3. Previous Growth Initiatives Haven’t Paid Off Yet

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Monro historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6%, somewhat low compared to the best consumer retail companies that consistently pump out 25%+.

Final Judgment

Monro doesn’t pass our quality test. Following the recent decline, the stock trades at 19.9× forward price-to-earnings (or $19.11 per share). This valuation tells us a lot of optimism is priced in - you can find better investment opportunities elsewhere. We’d suggest looking at the most dominant software business in the world.

Stocks We Would Buy Instead of Monro

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