Monro, Inc. — Fiscal 2020 Second-Quarter 10-Q
Business and reporting period: Monro operates automotive undercar repair, tire sales and service businesses in one operating segment. This filing covers the 13 weeks ended September 28, 2019, and the six months ended that date; comparisons are to the corresponding periods ended September 29, 2018. Fiscal 2020 ends March 28, 2020.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Sales | $324.1 million, up 5.5% | $641.2 million, up 6.3% |
| Comparable-store sales | Flat | Up 0.4% |
| Gross profit / margin | $122.1 million / 37.7%; prior-year margin 39.1% | $250.2 million / 39.0%; prior-year margin 39.3% |
| Operating income / margin | $33.4 million / 10.3%; down 3.3% in dollars | $69.7 million / 10.9%; up 3.2% in dollars |
| Net income | $20.3 million, down 6.6% | $42.9 million, up 1.2% |
| Diluted EPS | $0.60, versus $0.65 | $1.26, unchanged |
| Net interest expense | $7.0 million | $14.1 million |
Quarterly sales growth was primarily attributable to new stores, including acquisitions; comparable sales were flat. Six-month sales growth likewise reflected store additions, with $30.7 million of the increase attributable to fiscal 2020 and fiscal 2019 acquisitions. The company had 1,262 company-operated stores and 98 franchised locations at quarter-end.
Quarterly gross margin declined mainly because of higher tire material costs, labor costs from staffing levels and wage inflation, acquired-store mix, and weaker leverage on distribution and occupancy costs amid flat comparable sales. For the six-month period, higher labor costs were the primary margin pressure. Operating expenses rose with new-store growth. Quarterly net income and diluted EPS also faced comparison with prior-year nonrecurring Monro.Forward costs; the filing reports $0.02 per diluted share of such costs in the prior-year quarter.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow: $78.9 million, versus $76.0 million. Capital expenditures were $23.8 million and acquisitions, net of cash acquired, used $65.0 million; investing cash outflow was $88.4 million.
- Cash: $6.1 million at September 28, 2019, versus $6.2 million at March 30, 2019.
- Debt and lease obligations: Long-term debt was $168.9 million, up from $137.7 million at fiscal year-end. Finance leases and financing obligations totaled $297.3 million; operating lease liabilities totaled $198.2 million. Lease accounting adoption added substantial lease assets and liabilities to the balance sheet.
- Credit facility: The company entered a five-year, $600 million revolving facility in April 2019, with an option to request up to $250 million of additional capacity. At quarter-end, $168.9 million was outstanding, a $33.6 million letter of credit was outstanding, and net availability was $397.5 million. Monro reported compliance with all debt covenants.
- Dividends: $14.8 million was paid in the first half. The board intended to pay $0.22 per common share or equivalent quarterly during fiscal 2020, subject to board discretion and applicable restrictions.
Outlook, notable items and risks
- Management said it believes operating cash flow and bank financing provide sufficient resources for planned business expansion over the next 12 months. No specific earnings or sales guidance was provided.
- Monro spent approximately $88.8 million on capital requirements and expansion-related items in the first half and said it plans to continue seeking acquisitions. Subsequent to quarter-end, it acquired nine California stores and signed an agreement to acquire 18 stores in Nevada and Idaho; the proposed transaction was expected to close in fiscal 2020’s third quarter and be financed through the credit facility.
- Adoption of the new lease standard in fiscal 2020 increased reported assets and liabilities; the company recorded operating lease assets and liabilities and a cumulative-effect reduction to retained earnings of approximately $0.6 million. The filing says adoption did not materially affect income or cash flows.
- Management identifies risks including demand and economic conditions, seasonality and weather, competition and pricing, labor and parts supply, vendors and trade policy, leverage and interest-rate exposure, financing availability, technology changes, cybersecurity and personal-data protection, litigation, and acquisition integration and goodwill impairment.
- Unrecognized tax benefits were $7.0 million at quarter-end, with approximately $0.4 million of accrued interest and penalties. The company said ordinary-course legal claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether comparable-store sales and traffic improve, given flat quarterly comps and management’s report that higher average tickets were offset by lower traffic.
- Whether tire material costs, technician staffing and wage inflation continue to pressure gross margins.
- How acquisition-related sales, costs, integration and preliminary purchase-price allocations develop, including for the post-quarter acquisitions.
- Debt, lease obligations, facility availability and covenant compliance as Monro funds expansion and dividends; also monitor floating-rate exposure, which management estimated could change annual interest expense by approximately $1.7 million for a 100-basis-point LIBOR change at quarter-end debt levels.
- The board’s future dividend decisions and the company’s ability to maintain planned investment and expansion while managing liquidity.