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Taking a closer look at Midas

Monday, August 22, 2011 - 00:00

Midas reported stronger than expected Q2’11 results, with EPS of $0.15 coming in ahead of our estimate and consensus of $0.13 on stronger than expected revenue and gross profit. Comparable sales at the company’s U.S. franchised shops increased 2.2 percent, driven by a 2.0 percent increase in average daily car count. By category, suspension sales increased 8.1 percent, oil changes gained +5.0 percent, tire sales climbed 3.2 percent, while exhaust was flat and brakes declined by 2.5 percent. In addition, comparable shop sales at company-owned-and-operated Midas shops increased 4.5 percent in the second quarter.

Perhaps the most encouraging aspect of Q2 was the $200k operating profit generated by its company-owned store portfolio, an improvement of $700k yr/yr. Over the past few years, the challenging macro environment has weighed on the core of Midas’ business – the health of its franchise store network. This, in turn, has led to a greater number of company-operated shops as Midas corporate maintains effective real estate control of ~90 percent of its franchise locations, either through direct ownership or lease control agreements. Ultimately, Midas is a franchise business and these stores will need to be re-franchised to new operators, but challenging credit conditions for small business owners have complicated the process. In the interim, we are encouraged to see a greater focus on cost control and profitability, as we believe management had been fairly complacent about running operating losses from these shops in recent years.

The biggest takeaway from the quarter, however, was to be found in management’s remarks on the current depressed level of the company’s stock price (YTD, shares of Midas have lost 22 percent, compared with a decline of 5 percent for the Russell 3000). While the company has not formally hired an investment banker and management has not stepped in to personally buy stock at these levels, a broader discussion of other means to increase shareholder value is planned for its upcoming board meeting. And with the stock up almost 19 percent since earnings were reported after the close on Aug. 3 (Russell 3000 is down 7.5 percent during the same time frame), some investors are obviously taking note [please note this article was written Aug. 8]. We have long believed that there was un-monetized value in Midas stemming from its owned real estate, brand equity, network of more than 1,600 shops in North America and $83 million net operating loss carry-forward, particularly in the hands of a strategic buyer. That said, with a poison pill in place and a fairly generous change in control provision for certain executive officers, perhaps some degree of shareholder activism will be required to accelerate the pace of change.

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