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Industry Analyst Downgrades Monro Muffler Brake Shares

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Northcoast Research Holdings LLC is downgrading shares of Monro Muffler Brake Inc. Nick Mitchell, senior vice president of research, says the change reflects “increasing doubts regarding the organization’s ability to achieve its intermediate-term financial goals due to in-store execution issues, as well as lofty valuations.”

Monro is ranked third on the Modern Tire Dealer 100 list with 548 retail stores.

Northcoast downgraded the shares from "neutral" to "sell." In his July 14 report, Mitchell also says Northcoast is establishing a price target of $55. (The stock closed at $68.21 on July 13 and $64.18 on July 14.)

"Our rating change is predicated on: (1) subpar organic operating performances over the past five years in both good and bad times; (2) growing concern that these lackluster results are symptomatic of poor in-store execution; (3) increasing doubts regarding the organization’s ability to achieve its intermediate-term financial goals given these issues; and (4) lofty valuations.”

Mitchell bases his report on an "extensive amount of channel work," including store visits, conversations with industry suppliers, and discussions with competitors.

"We are of the opinion that Monro’s long streak of subpar results are largely a function of poor in-store execution rather than a prolonged deferral cycle and/or its overexposure to the Midwest, Northeast, and Upper Mid-Atlantic regions of the country, which tend to see more volatile demand trends due to weather anomalies, and perhaps even weaker economic growth than the rest of the country. “

He supports his thesis “with a detailed analysis of data collected from crowd-sourced review site Yelp.com and industry sales figures."

“The consumer-driven data illustrates that Monro is viewed as a terrible service provider in the eyes of consumers. In fact, the company’s mean star rating is meaningfully lower than the comparable statistic for a group of its peers, and the trend is deteriorating.

“We think comparable sales and EPS (earnings per share) trends will continue to fall short of the rate needed to achieve management’s five-year growth plan until the underlying in-store execution issues are corrected. Specifically, we believe the company needs to reinvest money into its stores and team members, including wages, benefits and training to reduce employee turnover and improve customer satisfaction,” he adds.

Monro will release its second-quarter results on July 28.

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