Business context and reporting period
Monro, Inc. (then Monro Muffler Brake, Inc.) filed this Form 10-K for fiscal 2014, the 52-week year ended March 29, 2014. The company operated 953 stores, with three franchised locations and 14 dealer-operated locations, primarily in the Northeast and Great Lakes regions. It provides undercar repair, tire and routine maintenance services; tires represented 44% of FY2014 sales.
Financial and operating performance
Amounts below are in millions of dollars unless noted.
| Metric | FY2014 | FY2013 |
|---|---|---|
| Sales | $831.4 | $732.0 |
| Gross profit / margin | $320.0 / 38.5% | $278.1 / 38.0% |
| Operating income / margin | $95.3 / 11.5% | $73.7 / 10.1% |
| Net income | $54.5 | $42.6 |
| Diluted EPS | $1.67 | $1.32 |
| Cash provided by operations | $93.9 | $84.4 |
| Capital expenditures | $32.2 | $34.2 |
- Sales grew 13.6%, primarily from acquired stores; comparable-store sales declined 0.5%. Acquisitions contributed about $107 million of sales growth, while closures reduced sales by $5 million.
- Management attributed improved gross and operating margins to payroll control, better labor productivity, and leverage of distribution and occupancy costs. Net interest expense rose to $9.5 million, mainly reflecting borrowing to fund acquisitions.
- Cash used for investing was $55.7 million, including $27.5 million for acquisitions. Cash used for financing was $38.5 million; dividends paid were $14.2 million. Cash ended the year at $1.2 million.
- At year-end, working capital was $31.4 million and total assets were $760.0 million. Long-term debt was $105.8 million; long-term capital leases and financing obligations were $81.2 million, in addition to current obligations.
- The $250 million revolving facility had $105.8 million outstanding, $121.5 million of net availability, and $22.7 million of outstanding letters of credit. The facility expires in December 2017; the company reported compliance with its covenants at year-end.
Changes, outlook, and material matters
- Compared with FY2013, sales, operating income, net income and diluted EPS increased. Comparable-store sales improved from a 7.3% decline in FY2013 to a 0.5% decline in FY2014, but remained negative.
- Management said weak economic conditions and consumers deferring higher-ticket repairs and tire replacements weighed on comparable sales. Comparable traffic was slightly higher, while average ticket declined. Harsh winter weather affected fourth-quarter sales through store closures and reduced customer travel.
- For FY2015, Monro planned approximately four new greenfield stores, continued to pursue acquisitions, and planned to expand alignment services at Tire Warehouse and Tire Barn Warehouse locations. The company also announced a quarterly dividend of $0.13 per share. No earnings or revenue guidance was provided in the supplied filing text.
- FY2014 included acquisitions for $27.5 million; acquired businesses contributed $15.1 million in sales and $0.1 million in net income from acquisition dates through year-end. Purchase-price allocations remained preliminary and could be adjusted. Subsequent to year-end, the company acquired two New Hampshire stores and signed agreements to acquire 19 Michigan stores.
- No material, extraordinary or unusual items were reported for FY2014’s fourth quarter, and the annual goodwill impairment test found no impairment. The FY2013 fourth quarter included an out-of-period lease-accounting adjustment: occupancy costs decreased $1.0 million and interest expense increased $0.5 million; management deemed the adjustment immaterial to current and prior periods.
- Key risks include intense competition and pricing pressure; economic, mileage and weather-related demand fluctuations; supplier concentration and reliance on imported products; skilled-labor availability; environmental, employment and consumer regulation; litigation; technology and data-security disruptions; acquisition integration and impairment risk; and floating-rate debt and covenant compliance. Management did not expect pending litigation, individually or in aggregate, to materially affect results, based on information available.
- The independent auditor reported fairly presented financial statements and effective internal control over financial reporting as of March 29, 2014.
Important facts for investors to verify
- Whether comparable-store sales and average ticket recover, and how much future growth depends on acquisitions rather than organic performance.
- Acquisition integration and returns, including any revisions to preliminary purchase accounting and the carrying value of goodwill and intangible assets.
- Debt levels, facility availability, covenant headroom, and sensitivity to LIBOR; also consider capital-lease and financing obligations and contractual lease commitments.
- Exposure to weak consumer demand, severe weather, tire-category mix, supplier concentration, imported inventory, and technician staffing.
- Progress on the planned FY2015 store openings, alignment-service expansion, and the announced acquisitions and dividend.