Business context and reporting period
Monro, Inc. (then Monro Muffler Brake, Inc.) filed this unaudited Form 10-Q for its first quarter of fiscal 2018, the 13 weeks ended June 24, 2017; comparable quarter ended June 25, 2016. Fiscal 2018 is a 53-week year ending March 31, 2018. Monro operates one reportable segment, with retail, commercial and wholesale tire and automotive-service operations.
Key financial results
| Metric | Quarter ended June 24, 2017 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $278.5 million | $235.3 million | +18.4% |
| Gross profit / margin | $112.9 million / 40.5% | $98.1 million / 41.7% | Margin down 1.2 percentage points |
| Operating income / margin | $33.7 million / 12.1% | $31.3 million / 13.3% | Income +7.8%; margin down 1.2 points |
| Net income | $17.6 million | $16.8 million | +5.0% |
| Diluted EPS | $0.53 | $0.50 | +6.0% |
| Operating cash flow | $41.4 million | $21.7 million | +$19.7 million |
SG&A was $79.1 million, or 28.4% of sales, unchanged as a percentage of sales. Net interest expense was $5.7 million versus $4.5 million; the effective tax rate was 37.2% versus 37.9%. Comprehensive income was $17.5 million.
Liquidity, debt and capital
At June 24, cash was $6.6 million, current assets $200.9 million and current liabilities $197.9 million. Long-term debt was $158.0 million; current debt, capital leases and financing obligations totaled $15.6 million, and long-term capital leases and financing obligations were $219.2 million. The $600 million revolving facility had $157.9 million drawn and $412.7 million net availability; $29.4 million of letters of credit were outstanding. Monro reported compliance with all debt covenants.
Cash from operations was $41.4 million; investing used $10.6 million, including $6.7 million of capital expenditures and $4.0 million for acquisitions. Financing used $33.3 million, including $108.3 million of debt and lease principal payments and $6.0 million of dividends. Cash declined $2.4 million to $6.6 million. The company said it expects sufficient operating cash flow and bank financing for planned expansion over the next 12 months.
Material changes and management commentary
- Sales rose $43.2 million, mainly from new stores ($41.5 million, including $34.8 million from fiscal 2017 acquisitions); comparable-store sales increased 1.4%. Higher average ticket was partly offset by lower traffic. Brakes comps rose about 6%, front-end/shocks 3%, tires and maintenance were flat, and alignments declined about 2%.
- Gross margin fell primarily because recent commercial and wholesale acquisitions contributed lower-margin sales. Those operations generated $24.3 million of revenue versus $2.4 million a year earlier and reduced consolidated gross margin by about 230 basis points, versus 20 basis points in the prior-year quarter. On a comparable-store basis, gross margin improved about 110 basis points, mainly from lower material costs as a share of sales.
- Operating expenses increased $12.3 million, primarily due to new stores and management-transition fees. Comparable-store operating expenses, excluding transition costs, increased about $2.9 million, mainly from performance-based manager pay and advertising.
- Weighted-average debt was about $69 million higher year over year, reflecting credit-facility borrowings and capital-lease debt associated with acquisitions and store expansion. The weighted-average interest rate also increased about 30 basis points.
- Monro acquired five stores during the quarter for an aggregate purchase price of $3.7 million; their post-acquisition-quarter sales were $0.5 million. Subsequent to quarter-end, it acquired stores in Illinois, North Carolina and Michigan, and signed an agreement to acquire eight Illinois and Indiana stores, expected to close in Q2 fiscal 2018.
Outlook, risks and unusual items
No specific earnings or sales guidance was provided. Management identified facility and systems upgrades, store growth and potential acquisitions as fiscal 2018 capital priorities, and plans to continue seeking acquisitions. The board stated its intention to pay a regular quarterly dividend of $0.18 per share or equivalent, subject to future board discretion, financial condition, capital needs and credit restrictions.
Risks cited include demand, competition and pricing, economic and weather conditions, seasonality, vendor and parts-supply dependence, leverage and interest-rate exposure, financing availability, automotive technology changes, cybersecurity and personal-data protection, business interruptions, litigation, and acquisition integration and goodwill impairment. A 1% change in LIBOR would change annual interest expense by approximately $1.6 million based on the quarter-end debt position. Monro guaranteed certain franchise-related lease payments with a maximum potential exposure of $6.6 million; a $0.6 million liability for anticipated defaults was recorded. Unrecognized tax benefits were $7.1 million, with about $0.5 million of accrued interest and penalties; tax years 2014–2016 remained open to federal examination.
Management reported effective disclosure controls and no material changes in internal control over financial reporting. Ordinary-course legal claims were not expected to have a material adverse effect. A new lease standard is expected to materially increase balance-sheet assets and liabilities, as about half of store leases and all land leases were then off balance sheet. The company did not expect the new revenue standard to have a material overall effect, though it anticipated changes to extended-warranty revenue deferrals.
Subsequent leadership changes included the announced departure of CEO John W. Van Heel effective October 1, 2017, and appointment of Brett Ponton as president effective August 1 and CEO effective October 2. Executive Chairman Robert G. Gross resigned effective immediately; Robert E. Mellor became independent chair, and two directors also resigned.
Most important facts for investors to verify
- Whether comparable-store sales and traffic trends improve, and whether the acquired commercial and wholesale mix continues to pressure gross margin.
- Debt, capital-lease obligations, interest costs, covenant compliance and remaining revolver availability as acquisitions and expansion continue.
- Cash conversion and working-capital movements, including the quarter’s substantial trade-payables cash inflow.
- Integration and performance of recent and announced acquisitions, including final purchase-price allocations and any related goodwill or impairment effects.
- Execution of leadership transition, dividend decisions, and the eventual balance-sheet impact of lease-accounting adoption.