MONRO, INC. (Monro Muffler Brake, Inc.) — FY2016 Form 10-K
Reporting period: Fiscal year ended March 26, 2016 (52 weeks). The request refers to “2015 Q4,” but this filing is an annual report for FY2016; its fourth quarter ended March 26, 2016.
Business context
Monro operates automotive undercar repair and tire-service locations. At year-end it had 1,029 company-operated stores, 135 franchised locations and 14 dealer-operated stores in 25 states, and serviced approximately 5.8 million vehicles during FY2016. Its sales mix was 45% tires, 27% maintenance, 15% brakes, 10% steering and 3% exhaust.
Financial and operating results
| Metric | FY2016 | FY2015 |
|---|---|---|
| Sales | $943.7 million | $894.5 million |
| Gross profit / margin | $385.7 million / 40.9% | $353.4 million / 39.5% |
| Operating income / margin | $120.6 million / 12.8% | $109.8 million / 12.3% |
| Net income | $66.8 million | $61.8 million |
| Diluted EPS | $2.00 | $1.88 |
| Net interest expense | $15.5 million | $11.3 million |
| Cash from operations | $126.5 million | $126.3 million |
| Capital expenditures | $36.8 million | $34.8 million |
- Annual sales grew 5.5%, primarily from new stores and acquisitions; comparable-store sales declined 0.1%. Comparable traffic rose slightly and average ticket fell slightly, each by less than 1%.
- Gross margin improved mainly because material costs—particularly oil and tire costs—declined. Operating expenses rose to 28.1% of sales from 27.2%, partly reflecting flat comparable sales and acquisition-related costs.
- Cash from operations less capital expenditures was approximately $89.7 million. Investing activities used $83.2 million, including $49.0 million for acquisitions; financing activities used $43.0 million.
- At year-end, cash was $8.0 million, working capital was $2.5 million, total assets were $999.4 million and shareholders’ equity was $536.2 million. Current assets were $170.1 million versus current liabilities of $167.6 million.
- Revolving-credit debt was $103.3 million; capital lease and financing obligations totaled $177.0 million, including $11.2 million current. The new $600 million revolving facility had $473.0 million of net availability, after $23.7 million of letters of credit. The company reported compliance with debt covenants.
Changes and notable developments
- Net income increased 8.1% and diluted EPS increased 6.4% year over year, while comparable-store sales remained slightly negative. Gross margin expanded 1.4 percentage points, but interest expense increased about $4.2 million as average debt and borrowing rates rose.
- Monro acquired businesses for an aggregate $51.1 million in FY2016, including the Car-X brand and franchise rights for 146 locations, and added or acquired 52 company stores while closing 22. Goodwill increased to $400.1 million from $349.1 million; the company reported no goodwill impairment.
- On January 25, 2016, Monro entered a five-year, $600 million revolving credit facility, increasing borrowing capacity by $350 million. Capital lease and financing obligations rose to $177.0 million from $142.1 million.
- FY2016 included a $0.7 million discrete tax benefit; excluding it, the effective tax rate was approximately 37.3%, versus the reported 36.6%. The filing reports no material or unusual fourth-quarter items.
- Quarter four sales were $229.0 million versus $219.1 million a year earlier; net income was $13.9 million versus $12.6 million, and diluted EPS was $0.42 versus $0.38.
Outlook, risks and contingencies
- Management planned approximately 20–40 new greenfield stores in FY2017 and intended to continue pursuing acquisitions. It stated that cash flow and bank financing were expected to support planned growth and contractual commitments. No earnings or sales guidance was provided.
- After year-end, on May 1, 2016, Monro acquired 29 Florida retail/commercial tire and repair stores and one retread plant from McGee Tire Stores.
- The Board announced a quarterly dividend of $0.17 per share in May 2016, up from $0.15 in FY2016. Credit-facility terms cap cash dividends at 50% of the preceding year’s net income.
- Key risks include intense price competition; weak comparable-store demand, economic conditions, weather and seasonality; reliance on vendors (the ten largest represented approximately 76% of purchases, and about 27% of parts, oil and tire purchases were imported); skilled-technician availability; acquisition integration and goodwill impairment; floating-rate debt; cybersecurity and business interruptions; and environmental, employment and other regulation.
- Management said pending litigation was not expected to be material based on currently available information. Monro guaranteed certain franchisee lease payments up to $10.4 million and recorded a $0.7 million liability for anticipated defaults. The company is largely self-insured for workers’ compensation, general liability and employee medical claims, with stop-loss coverage.
- A $1.0 million payment for financial and strategic advisory services related to three unsuccessful acquisitions was incurred in FY2016; the related consulting agreement ended immediately. The filing also describes related-party leases and advisory arrangements.
- Management and the independent auditor concluded internal control over financial reporting was effective as of year-end; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether comparable-store sales and average ticket improve, and whether growth continues to depend primarily on acquisitions.
- Whether gross-margin gains from lower material costs persist and offset higher operating and labor expenses.
- Debt, capital-lease obligations, interest-rate exposure, covenant headroom and the capacity to fund acquisitions, store openings and dividends.
- Integration and returns from Car-X and other acquired locations, including the subsequent McGee acquisition, and the assumptions supporting the substantial goodwill balance.
- Potential effects of vendor concentration and imports, technician retention, lease commitments, self-insurance estimates, litigation and franchisee lease guarantees.