Monro, Inc. — Q3 FY2024 Form 10-Q
Reporting period: Third quarter ended December 23, 2023; nine-month results cover the period from the start of fiscal 2024. Fiscal 2024 is a 53-week year. Monro operates 1,296 company stores in 32 states and 51 franchised locations, focused on automotive repair, tires, and related services.
Financial results
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Sales | $317.7m | $335.2m | $966.7m | $1,014.5m |
| Gross profit / margin | $112.7m / 35.5% | $113.5m / 33.8% | $342.0m / 35.4% | $352.4m / 34.7% |
| Operating income | $21.4m | $23.8m | $61.1m | $73.6m |
| Net income | $12.2m | $13.0m | $33.9m | $38.6m |
| Diluted EPS | $0.38 | $0.41 | $1.05 | $1.17 |
| Adjusted diluted EPS (non-GAAP) | $0.39 | $0.43 | $1.11 | $1.27 |
- Q3 sales declined 5.2%; comparable-store sales fell 6.1%. Nine-month sales declined 4.7%, with comparable-store sales down 2.7%.
- Q3 gross margin improved 170 basis points, mainly from lower material costs, tire mix, pricing actions, and reduced technician hours; fixed distribution and occupancy costs partly offset the benefit. Nine-month gross margin increased 70 basis points.
- Q3 operating income decreased 10.3%; nine-month operating income decreased 17.0%. OSG&A rose 1.9% in Q3 and 0.8% for nine months, including back-office transition and headquarters relocation costs.
- Net interest expense was $5.0m in Q3 and $15.1m for nine months, down from the comparable periods despite higher floating borrowing rates, as average debt was lower.
Cash flow, debt, and liquidity
- For nine months, operating cash flow was $130.5m versus $171.2m. Capital expenditures were $18.9m; investing cash flow was a $0.3m use, compared with $35.6m provided a year earlier, which included proceeds from the wholesale tire divestiture.
- Financing activities used $111.2m, including $44.0m of share repurchases, $26.8m of dividends, and debt and finance-lease principal payments. Cash ended at $23.8m.
- At December 23, 2023, revolving-credit-facility debt was $94.0m, with $475.9m available; a $30.1m letter of credit was outstanding. The facility matures in November 2027. The company reported compliance with its debt covenants.
- Working-capital deficit was $214.9m, versus $190.7m at March 25, 2023; the increase was attributed primarily to accounts payable and supplier participation in the supply-chain finance program. Eligible supplier obligations under that program were $168.4m and are included in accounts payable.
- Management said current funding sources should provide adequate liquidity for the next 12 months and longer term. Fiscal 2024 capital expenditures were expected to be $30m–$35m.
Changes, outlook, and risks
- Management attributed weaker sales mainly to lower traffic, milder weather, and budget-pressured low- and middle-income customers deferring high-ticket tire purchases. Q3 comparable tire sales fell 9%; comparable maintenance sales fell 3%.
- Management expected inflationary pressures to continue affecting customers through the remainder of fiscal 2024. It also cited constrained labor availability, wage inflation, higher interest rates, and potential economic slowdown or recession as risks to demand, costs, and results.
- No specific full-year sales or earnings guidance was provided in the supplied filing text. Management expected positive operating cash flow and said it would balance investment, debt repayment, dividends, and buybacks.
- The 2022 wholesale tire and distribution divestiture generated further escrow and earnout receipts; $20.2m of earnout consideration remained outstanding at quarter-end. After earnout payments are completed, company stores must source at least 90% of specified tire requirements through ATD, subject to stated supply exceptions.
- During the quarter, the company repurchased about 1.54m shares for $44.0m at an average $28.50 per share. The $150m authorization had $9.1m remaining at quarter-end.
- A preferred-stock reclassification agreement raises the conversion rate from 23.389 to 61.275 common shares per preferred share and requires conversion by the agreed sunset date, no later than August 2026. No preferred shares converted during the quarter; future conversion may dilute common shareholders.
- The company classified its Rochester headquarters assets as held for sale and plans to relocate within the greater Rochester area. It reported routine legal proceedings; an unfavorable outcome could materially affect results, though no specific material claim amount was provided.
Investor verification priorities
- Track comparable-store sales, traffic, and tire unit trends, and whether customer deferrals and weather continue to pressure demand.
- Assess the durability of gross-margin improvement against labor inflation and under-absorbed fixed occupancy and distribution costs.
- Review operating cash flow alongside the sizable supplier-finance balance and accounts-payable timing, rather than treating working-capital contributions as recurring cash generation.
- Confirm the remaining buyback authorization, cash needs, and debt-covenant headroom as the company funds dividends, capital spending, and leases.
- Monitor the preferred-stock conversion timetable and potential share dilution, as well as the headquarters sale and remaining ATD earnout receipts and sourcing obligations.