Business context and reporting period
Monro, Inc. operates automotive repair, tire sales and service businesses in one operating segment. This unaudited Form 10-Q covers the 13 weeks ended September 29, 2018 (fiscal Q2 2019) and the six months ended that date, compared with corresponding fiscal 2018 periods.
Financial performance
| Metric | Fiscal Q2 2019 | Six months FY2019 |
|---|---|---|
| Sales | $307.1 million, up 10.5% | $602.9 million, up 8.3% |
| Comparable-store sales | Up 3.2%; 2.9% adjusted for hurricane-related selling days | Up 2.5%; 2.4% adjusted for hurricane-related selling days |
| Gross profit / margin | $119.9 million / 39.1%, versus 38.8% | $237.2 million / 39.3%, versus 39.7% |
| Operating income / margin | $34.5 million / 11.2%, versus 12.2% | $67.6 million / 11.2%, versus 12.1% |
| Net income | $21.8 million, up 26.0% | $42.4 million, up 21.7% |
| Diluted EPS | $0.65, up 25.0% | $1.26, up 20.0% |
| Operating cash flow | $76.0 million for six months, versus $75.1 million |
Six-month capital expenditures were $21.7 million and acquisitions, net of cash acquired, used $39.1 million. Cash increased $0.3 million to $2.2 million. At September 29, 2018, long-term debt was $151.4 million; capital leases and financing obligations totaled $249.3 million. The $600 million revolving facility had $151.3 million outstanding, $31.4 million in letters of credit, and $417.3 million net availability. Monro reported compliance with all debt covenants.
Material changes and management commentary
- Sales growth reflected new stores and acquisitions, as well as comparable-store gains. Acquired businesses contributed $13.3 million of Q2 sales and $18.7 million for the six-month period. The company spent $38.7 million on acquisitions during the six months.
- Q2 gross margin improved year over year, helped by labor-cost control and leverage on distribution and occupancy costs. For the six months, margin declined as acquisitions shifted sales toward lower-margin commercial and wholesale tires. Management estimated those locations reduced consolidated Q2 gross margin by 430 basis points, compared with 300 basis points a year earlier.
- Operating expenses rose to 27.8% of Q2 sales from 26.7%, including $1.8 million of Monro.Forward initiative costs, of which $1.0 million was one-time. Diluted EPS included approximately $0.02 of Q2 and $0.04 of six-month non-recurring Monro.Forward costs.
- The effective tax rate fell to 22.2% in Q2 and 22.5% for six months, from 38.2% and 37.7%, respectively, primarily due to the Tax Act’s lower federal corporate tax rate. The company noted that further tax-accounting adjustments could affect later-period tax expense.
- Monro stated it had sufficient resources for its planned expansion over the next 12 months and intended to continue seeking acquisitions. It had agreements to acquire 15 stores, expected to close in fiscal Q3 and Q4 and be financed through the credit facility. Subsequent to quarter-end, it acquired six stores, also financed through the facility.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. The company expects the new lease accounting standard to materially affect its balance sheet: substantially all operating lease commitments are expected to be recognized as right-of-use assets and lease liabilities. Interest-rate exposure is material; management estimated that a 1% change in LIBOR would change annual interest expense by approximately $1.5 million based on the stated debt position.
Risks highlighted include tariffs on imported products such as tires, which could raise costs or require price increases that affect demand; weather and natural disasters; competition and pricing; vendor and supply constraints; leverage and interest rates; acquisition integration; technology and data security; and litigation. Hurricane Florence temporarily closed 24 stores during the quarter, with all but one reopened at the time described; Hurricane Michael temporarily closed ten stores after quarter-end, and all had reopened. The company reported ordinary-course legal claims that it did not expect to have a material adverse effect. It guaranteed certain franchisee-related lease payments, with a maximum potential exposure of $2.6 million through April 2020; no liability for anticipated defaults was recorded at quarter-end.
Important facts for investors to verify
- Whether comparable-store growth and operating performance persist after separating acquisition contributions, hurricane effects and barter sales.
- How lower-margin commercial and wholesale acquisitions affect consolidated margins, and whether expected acquisition synergies materialize.
- Future debt, interest expense, covenant headroom and financing needs as acquisitions and store expansion continue.
- The eventual balance-sheet impact of lease-standard adoption, and the effects of tariffs, tax adjustments and other disclosed risks.