Monro Muffler Brake, Inc. — Q1 Fiscal 2014 10-Q
Business context and reporting period. The filing covers the 13 weeks from March 31 through June 29, 2013, compared with the 13 weeks ended June 30, 2012. Monro operated 935 company stores and three franchised locations at quarter-end. Financial amounts below are in U.S. dollars; statement figures are in millions unless noted.
Financial results and liquidity
- Sales: $206.2 million, up 21.9% from $169.2 million. Comparable-store sales rose 1.2%.
- Profitability: Gross profit was $78.9 million, up 15.8%; gross margin was 38.3%, down from 40.3%. Operating income rose 17.4% to $23.1 million, with operating margin declining to 11.2% from 11.6%. Net income increased 16.6% to $13.6 million; diluted EPS was $0.42 versus $0.36.
- Cash flow: Operating cash flow was $33.5 million, compared with $18.8 million. Capital expenditures were $7.4 million. Cash decreased $22,000 to $1.4 million.
- Debt and liquidity: Long-term debt was $104.0 million, down from $127.8 million at March 30; the balance sheet also reports $4.8 million of current debt and about $62.0 million of capital leases and financing obligations. The $250 million revolving facility had $103 million outstanding and $124 million of net availability after letters of credit. The company reported compliance with all debt covenants.
- Balance sheet: Total assets were $703.6 million and total liabilities $324.4 million at June 29, 2013. Current assets were $159.7 million versus current liabilities of $139.0 million.
Material changes versus prior period
- Sales growth was primarily acquisition-related: new stores contributed $36.0 million, including $34.4 million from fiscal 2013 acquisitions other than Kramer; closed stores reduced sales by $1.0 million. Comparable-store growth included higher maintenance, tire and alignment sales, increased traffic, advertising and price increases.
- Management attributed the lower gross margin mainly to higher material costs and a mix shift toward lower-margin tires, including the effect of acquired tire stores. Excluding fiscal 2013 acquisition stores, gross margin was essentially flat year over year. Labor productivity and distribution and occupancy cost leverage improved.
- SG&A rose in dollars, including more than $7.7 million of expenses associated with a full quarter of fiscal 2013 acquisition stores, but declined as a percentage of sales to 27.1% from 28.6%.
- Interest expense increased about $0.5 million; management cited higher average debt, largely offset by a lower weighted average interest rate. The effective tax rate was 36.4%, versus 36.9%.
Outlook, risks and unusual items
- Management said it expected to have sufficient resources, including operating cash flow and bank financing, for planned expansion over the next 12 months. No quantified earnings or sales guidance was provided.
- On July 19, 2013, Monro signed an agreement to acquire 10 Curry’s Automotive Group stores in the Washington, D.C. area. The stores had approximately $18 million in unaudited historical annual sales; closing was expected in Q2 fiscal 2014, financed through the existing credit facility.
- Management cited weak economic conditions and consumers deferring vehicle repairs. Other identified risks include competition and pricing, parts supply, automotive technology and regulation, leverage and interest-rate exposure, capital availability, acquisition integration, litigation, and cybersecurity and data protection.
- Unrecognized tax benefits were $5.4 million; approximately $0.6 million of related interest and penalties was accrued. State audits for fiscal 2007–2010 could conclude within 12 months, but the effect of any resulting change could not be estimated. The company said ordinary-course claims and lawsuits were not expected to have a material adverse effect.
- The board stated its intention to pay a regular quarterly dividend of $0.11 per common share or equivalent, subject to future board decisions and applicable restrictions. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-store sales momentum continues and how much future growth depends on acquisitions rather than existing stores.
- Whether tire mix and material costs continue to pressure gross margin, and whether operating-expense leverage offsets that pressure.
- The Curry’s acquisition’s closing, financing, integration costs and actual contribution compared with its stated historical sales.
- Revolver availability, covenant compliance, interest-rate sensitivity and debt service as the company pursues store expansion.
- The resolution and potential financial effects of tax audits and unrecognized tax positions; the filing does not quantify a possible adjustment.