Monro, Inc. (Monro Muffler Brake, Inc.) — Q3 FY2014 Form 10-Q
Reporting period: Quarter ended December 28, 2013 (13 weeks); nine months ended December 28, 2013 (39 weeks). Comparatives are the corresponding periods ended December 29, 2012. Fiscal 2014 ends March 29, 2014.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Sales | $216.7 million, up 13.8% | $628.2 million, up 17.2% |
| Comparable-store sales | Up 0.3% | Down 0.2% |
| Gross profit / margin | $82.3 million / 38.0%, versus 36.6% | $243.0 million / 38.7%, flat margin |
| Operating income / margin | $26.9 million / 12.4%, up 43.0% | $73.9 million / 11.8%, up 27.0% |
| Net income | $15.3 million, up 36.2% | $42.6 million, up 23.5% |
| Diluted EPS | $0.47, versus $0.35 | $1.31, versus $1.07 |
All financial amounts above are in U.S. dollars. Quarterly net interest expense rose to $3.2 million from $1.5 million; nine-month interest expense rose to $7.1 million from $4.1 million. Effective tax rates were 36.3% for the quarter and 36.9% year to date.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $75.0 million, versus $63.2 million. Capital expenditures were $21.7 million; acquisition cash outflow was $26.3 million. Cash increased $3.4 million to $4.9 million.
- At December 28, 2013, total assets were $761.4 million and shareholders’ equity was $404.4 million. Current assets of $173.0 million exceeded current liabilities of $142.5 million.
- Long-term debt was $112.5 million, down from $127.8 million at March 30, 2013. Capital leases and financing obligations totaled approximately $87.5 million, including current obligations.
- The $250 million revolving credit facility had $112.5 million outstanding, a $22.7 million letter of credit, and $114.8 million net availability. The facility expires in December 2017; the company reported compliance with all debt covenants.
- The company paid $10.6 million in dividends during the first nine months. Its announced quarterly dividend was $0.11 per common share or equivalent, subject to Board discretion and credit-facility restrictions.
Changes, operating developments and management commentary
- Quarterly sales growth primarily reflected $29.6 million from new stores (excluding Kramer stores); closed stores reduced sales by $1.5 million. Year-to-date, new stores contributed $99.5 million, partly offset by lower comparable-store sales and $3.9 million from closed stores.
- Management attributed the quarter’s comparable-sales increase mainly to stronger tire and brake sales amid harsher winter weather, while consumers continued to defer repairs in other service categories amid weak economic conditions.
- Management cited improved leverage on distribution, occupancy and operating costs, focused payroll control, and higher labor productivity. Tire-heavy acquisition mix partly offset lower product costs. Nine-month gross margin was unchanged year over year.
- Monro had 951 company-operated stores and three franchised locations at quarter end, compared with 918 company-operated stores and three franchised locations a year earlier. It added 13 stores and closed two during the quarter; year to date it added 26 and closed 12.
- Fiscal 2014 acquisitions included 20 stores in the Washington, D.C. area and Delaware, Maryland and Kentucky. They were funded through the existing credit facility and were described as not material to the financial statements.
- Final purchase accounting for several fiscal 2013 acquisitions increased goodwill by $14.5 million, including adjustments to acquired property, intangibles, deferred taxes and lease obligations. The company said further valuation adjustments for acquisitions could be material. A fiscal 2014 store acquisition generated a $0.3 million bargain-purchase gain.
- The prior-year quarter included a $2.4 million sale of slow-moving inventory for barter credits; there was no comparable transaction in the current quarter. Management believes operating resources and financing are sufficient for planned expansion over the next 12 months and intends to continue seeking acquisitions. No specific earnings or revenue guidance was provided.
Risks, contingencies and controls
Disclosed risks include demand and economic conditions, competition and pricing, store renovation and capital needs, seasonality, parts supply, automotive technology and regulation, leverage and interest-rate exposure, financing availability, acquisition integration and goodwill impairment, litigation, and cybersecurity and personal-data protection. A 1% LIBOR change was estimated to affect annual interest expense by approximately $1.1 million based on quarter-end debt. Unrecognized tax benefits were $5.3 million, with about $0.3 million of related interest and penalties accrued; tax examinations remained possible for fiscal 2011–2013 federal returns and various state years. Routine legal claims were not expected to have a material adverse effect. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether winter-related tire and brake demand and comparable-store trends persist after the quarter.
- Acquisition contributions, integration performance, remaining purchase-accounting estimates and potential goodwill or valuation impacts.
- Interest expense and leverage, including capital lease obligations, floating-rate exposure, covenant headroom and credit-facility availability.
- Cash generation relative to expansion, capital spending, dividends and future acquisitions.
- Whether deferred service repairs, weak economic conditions or other disclosed operating risks affect future sales and margins.