Monro, Inc. (Monro Muffler Brake, Inc.) — Q2 FY2012 Form 10-Q
Reporting period: 13-week quarter ended September 24, 2011; six-month year-to-date period ended the same date. Fiscal year ends March 31, 2012. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Sales | $173.3 | $162.1 | $338.1 | $320.3 |
| Gross profit / margin | $71.3 / 41.2% | $66.4 / 40.9% | $142.1 / 42.0% | $132.4 / 41.3% |
| Operating income / margin | $25.2 / 14.5% | $22.7 / 14.0% | $51.3 / 15.2% | $45.3 / 14.1% |
| Net income | $15.1 | $13.3 | $30.6 | $26.5 |
| Diluted EPS | $0.47 | $0.42 | $0.95 | $0.84 |
- Quarterly sales increased 6.9%; comparable-store sales declined 0.8%. Management attributed the increase primarily to new stores, partly offset by closed stores and weaker comparable sales.
- Year-to-date sales rose 5.5%, with comparable-store sales up 0.7%. Quarterly and six-month net income increased 13.5% and 15.2%, respectively.
- Operating cash flow was $38.2, versus $30.8 in the prior-year six months. Capital expenditures were $11.2 and acquisition spending was $32.5; investing cash outflow was $43.7. Cash increased $0.1 to $2.7.
- At September 24, current assets were $138.0 and current liabilities $104.1. Current and long-term debt totaled $65.7, compared with $55.0 at March 26, 2011. Separately, the company disclosed $44.4 of capital lease obligations.
- The company had $20.7 outstanding under its $175 revolving facility and $18.3 in letters of credit; stated net availability was $136. Management reported compliance with all debt covenants.
Material changes and management commentary
- Quarterly gross margin improved 0.3 percentage points and year-to-date margin improved 0.7 points. Management cited better leverage of distribution and occupancy costs and improved labor efficiency; higher material costs, particularly oil and tires, partly offset these gains.
- Quarterly SG&A was $45.9, or 26.5% of sales, versus $43.1, or 26.6%. Acquired stores added $2.4 to quarterly direct store expenses. Net interest expense rose $0.1 in the quarter, while declining $0.2 year to date; management cited higher weighted-average interest rates despite lower average debt.
- Consumer weakness, elevated gasoline prices, and low confidence were cited as factors behind deferred tire purchases and repairs. Tire sales were relatively flat for the quarter: fewer units were offset by higher selling prices. Exhaust and brake comparable sales increased.
- The company acquired 24 Pennsylvania and New Jersey stores from Vespia Tire Centers in June, funded through its credit facility. A seven-store Terry’s Tire Town acquisition closed October 9, 2011, after quarter-end. The company operated 802 stores at quarter-end, versus 783 a year earlier.
Outlook, risks, and unusual items
- No quantified earnings or sales guidance was provided. Management said available cash, operating cash flow, and bank financing were expected to support planned expansion for the next 12 months. Capital priorities include facility and systems upgrades, an approximately $4.0 Rochester office and warehouse expansion, and store growth or acquisitions.
- Risks identified include economic conditions and demand, competition and pricing, supply constraints, capital needs and financing availability, leverage and interest-rate sensitivity, and integrating acquisitions. A 1% LIBOR change was estimated to affect interest expense by approximately $0.2 based on the quarter-end debt position.
- A quarterly bulk sale of approximately $2.9 of slower-moving inventory for barter credits reduced gross profit and operating expenses by 0.2% and 0.4% of sales, respectively, versus the prior-year quarter.
- Purchase-price allocation for Vespia was finalized during the quarter, with measurement-period adjustments to property, deferred taxes, goodwill, intangibles, and long-term debt; the filing reported no significant income-statement adjustments from the acquisition.
- Unrecognized tax benefits were $6.3, with approximately $1.1 of related interest and penalties accrued. State tax audits covering fiscal 2001–2010 could conclude within 12 months, but the financial effect of any changes could not be estimated. Routine legal claims were not expected by the company to have a material adverse effect.
Important facts for investors to verify
- Whether comparable-store sales and tire-unit demand recover, given management’s discussion of deferred repairs and consumer resistance to higher tire prices.
- Whether gross-margin improvement can persist amid higher material costs, and whether acquired stores deliver expected performance.
- Debt and liquidity after the acquisitions, planned capital spending, dividends, and any further store purchases; confirm covenant headroom and borrowing costs.
- Outcomes of tax examinations and any resulting change in uncertain tax liabilities.
- Terms and financial impact of the post-quarter Terry’s Tire Town acquisition and the company’s planned expansion spending.