Business context and reporting period
Monro, Inc. operates automotive undercar repair and tire sales and service locations in the United States. This unaudited Form 10-Q covers the fiscal third quarter (13 weeks ended December 26, 2020) and first nine months of fiscal 2021 (39 weeks ended December 26, 2020); comparisons are with the corresponding periods of fiscal 2020.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Sales | $284.6 million | $329.3 million | $820.2 million | $970.5 million |
| Gross profit / margin | $96.1 million / 33.8% | $124.4 million / 37.8% | $288.1 million / 35.1% | $374.6 million / 38.6% |
| Operating income / margin | $15.7 million / 5.5% | $31.6 million / 9.6% | $51.5 million / 6.3% | $101.3 million / 10.4% |
| Net income | $6.7 million | $18.9 million | $22.5 million | $61.8 million |
| Diluted EPS | $0.20 | $0.56 | $0.67 | $1.82 |
| Operating cash flow | — | — | $159.2 million | $125.8 million |
Q3 comparable-store sales fell 13.0%; nine-month comparable-store sales fell 16.8%. Q3 sales declined 13.6% overall, while nine-month sales declined 15.5%. The company reported adjusted diluted EPS, a non-GAAP measure, of $0.22 for Q3 and $0.77 for the nine-month period, versus $0.60 and $1.91, respectively, in the prior-year periods.
Liquidity, debt and capital
At December 26, 2020, cash and cash equivalents were $25.0 million, compared with $345.5 million at March 28, 2020. Long-term debt was $190.0 million, down from $566.4 million; Monro said it repaid the $350 million precautionary facility borrowing made in March 2020. Net availability under its $600 million revolving credit facility was $376.4 million, and the company reported compliance with debt covenants. Finance leases and financing obligations totaled $409.7 million. Nine-month financing cash outflow was $423.8 million, including $400.7 million of principal payments and $22.3 million of dividends.
Material changes, outlook and risks
- COVID-19-related lower demand, reduced store hours and traffic, and staffing inefficiencies weighed on sales and profitability. Management cited tire-heavy sales mix, higher material costs, and reduced leverage on distribution and occupancy costs as factors pressuring gross margin.
- Management reported sales improvement from the April 2020 low, but stated there was no assurance of a return to pre-pandemic levels. Monthly comparable-store sales were down 6% in December and up 3% in January as reported; management cautioned that trends may not continue.
- The company reduced operating costs, shifted marketing toward digital channels, negotiated rent deferrals, and secured rent reductions on about 23% of lease contracts in exchange for longer terms. The lease changes increased recorded finance and operating lease assets and liabilities.
- Monro acquired 17 California stores for $17.4 million in December 2020, its first reported acquisition activity after pausing acquisitions during the first half of fiscal 2021. It continued rebrand and reimage work and had substantially transformed 144 stores by quarter-end.
- No specific earnings or sales guidance was provided. Management said it believed available operating cash flow, cash and/or bank financing would support operations for at least 12 months. COVID-19 duration and effects, customer demand, labor availability, supply chain disruption, interest rates, leverage and covenant compliance remain risks.
- The credit facility amendment provides temporary covenant flexibility through fiscal 2022, including a $275 million monthly minimum liquidity requirement during the specified period. Future dividends remain subject to board discretion, facility restrictions and financial condition.
Most important facts for investors to verify
- Whether comparable-store sales and store traffic recover, and whether the reported January improvement persists.
- Whether gross margins stabilize as sales mix, material costs, labor productivity and fixed-cost absorption change.
- Cash generation, revolver availability, debt and lease obligations, and continued compliance with amended credit covenants.
- COVID-19-related cost, labor, supply-chain and customer-demand effects, including any impact on planned acquisitions and store initiatives.
- Non-GAAP adjusted results against GAAP results, including the nature and recurrence of excluded items; the filing reported a $0.25 million litigation reserve reversal in the quarter.