Business context and reporting period
Monro, Inc. operates automotive undercar repair and tire sales and service businesses in one reportable segment. This Form 10-Q covers the 13-week second quarter and 26-week first half of fiscal 2021, ended September 26, 2020; comparisons are to the corresponding 2019 periods. The company reported significant operating disruption from COVID-19.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Sales | $288.6 million, down 11.0% | $535.6 million, down 16.5% |
| Comparable store sales | Down 11.4% | Down 18.7% |
| Gross profit / margin | $104.5 million / 36.2%, versus $122.1 million / 37.7% | $192.0 million / 35.8%, versus $250.2 million / 39.0% |
| Operating income / margin | $24.4 million / 8.5%, down 26.8% | $35.8 million / 6.7%, down 48.6% |
| Net income | $12.8 million, down 36.8% | $15.8 million, down 63.1% |
| Diluted EPS | $0.38, versus $0.60 | $0.47, versus $1.26 |
| Adjusted diluted EPS (non-GAAP) | $0.39, versus $0.62 | $0.54, versus $1.31 |
| Operating cash flow | $125.7 million, versus $80.1 million in the prior-year six months |
Six-month capital expenditures were $23.6 million. Cash and equivalents were $81.5 million at September 26, down from $345.5 million at fiscal year-end. The company reported $231.3 million of revolving-credit-facility debt and $335.1 million of net facility availability; it was in compliance with debt covenants. Finance leases and financing obligations were substantial: $400.3 million at September 26, excluding operating lease liabilities. Six-month dividends paid were $14.9 million.
Material changes and management commentary
- COVID-related traffic declines and reduced store hours weighed on sales. Lower sales reduced leverage over distribution and occupancy costs; sales mix shifted toward tires, increasing material costs as a percentage of sales. Staffing optimization improved technician labor productivity, while expense reductions helped limit operating-cost growth.
- Monthly comparable-store sales declines improved from 41% in April to 8% in September, then were 12% in October. Management cautioned that these trends may not continue and that a full recovery to pre-pandemic levels is uncertain.
- To protect liquidity, Monro borrowed $350 million under its credit facility in March and repaid $335 million during the first half. It reported approximately $46 million cash on hand at October 30 and a further $41 million of facility borrowings repaid during October.
- The June credit-facility amendment provided temporary covenant flexibility through the first quarter of fiscal 2022, including a $275 million monthly liquidity requirement and revised leverage limits. The amendment also set a minimum borrowing spread during the relief period. Future dividends and acquisitions remain subject to facility conditions.
- Rent reductions covering approximately 23% of lease contracts, generally exchanged for extended lease terms, resulted in lease remeasurements that increased recorded lease assets and obligations. Rent deferrals are repayable mainly in the latter half of fiscal 2021 and first half of fiscal 2022.
Outlook, risks, and unusual items
No quantified earnings or revenue guidance is provided. Management said it believes liquidity from operations, cash and/or borrowing capacity is sufficient for at least the next 12 months, but cannot estimate the pandemic’s long-term effects. Risks include prolonged or renewed demand weakness, changes in driving and travel patterns, supply-chain disruption, additional safety costs, labor inefficiencies, and possible covenant pressure or asset impairment.
Acquisitions were paused during the first half. After quarter-end, Monro signed an agreement to acquire 17 California stores, expected to close in fiscal Q3 and be financed through the credit facility. Adjusted results exclude items such as store-closing costs, Monro.Forward initiative costs, and management transition costs; these non-GAAP measures are not substitutes for GAAP results. Six-month adjusted net income was $18.4 million versus GAAP net income of $15.8 million.
Investor facts to verify
- Whether comparable-store sales recovery continued after October and how traffic, average ticket, and store hours evolved.
- Cash generation and working-capital movements, including whether operating cash flow remains resilient as rent deferrals are repaid.
- Credit-facility availability, covenant compliance, borrowing costs, and total debt and lease obligations.
- Completion, financing, and integration of the proposed 17-store acquisition, and the pace of other expansion initiatives.
- Future dividend decisions and the ongoing effects of COVID-19 on demand, staffing, costs, and store operations.