Business context and reporting period
Monro, Inc. filed this unaudited Form 10-Q for fiscal 2022 Q1, the three months ended June 26, 2021, compared with the three months ended June 27, 2020. It operates automotive repair, tire and related-service businesses; at quarter-end it had 1,291 company-operated stores, 91 franchised locations, seven wholesale locations and three retread facilities. The company reports one operating segment.
Financial and operating performance
| Metric | Q1 2022 | Prior-year period |
|---|---|---|
| Sales | $341.8 million | $247.1 million |
| Gross profit / margin | $125.9 million / 36.8% | $87.5 million / 35.4% |
| Operating income | $27.9 million | $11.4 million |
| Net income | $15.7 million | $3.0 million |
| Diluted EPS | $0.46 | $0.09 |
| Adjusted diluted EPS (non-GAAP) | $0.55 | $0.15 |
| Cash from operations | $62.7 million | $72.5 million |
Sales rose 38.4%; comparable-store sales increased 34.5%, with growth attributed to higher guest traffic and average ticket. Gross margin expanded 140 basis points, mainly from better leverage on distribution and occupancy costs, sales mix and tire pricing, partly offset by higher technician labor costs. Operating, selling, general and administrative expenses were $98.0 million, or 28.7% of sales, versus $76.1 million, or 30.8%. GAAP results include $3.9 million of litigation settlement expense; adjusted results exclude this and other specified items.
Operating cash flow was below the prior-year period, which benefited from working-capital cash inflows, including lower inventory purchases. Investing used $66.8 million, principally for a $62.1 million acquisition and $5.2 million of capital expenditures. Financing used $9.0 million; quarter-end cash was $16.9 million, down from $30.0 million at fiscal year-end.
Balance sheet, liquidity and capital allocation
At June 26, 2021, the company had $198.0 million drawn on its $600 million revolving credit facility and $372.4 million available; it reported compliance with all debt covenants. Cash was $16.9 million. The variable-rate debt’s carrying value approximated fair value. A 100-basis-point LIBOR change was estimated to affect annual interest expense by approximately $2.0 million, based on quarter-end debt.
Finance lease and financing obligations totaled $419.7 million on the balance sheet, and operating lease liabilities totaled $230.3 million. Contractual undiscounted finance and operating lease payments were $618.3 million through October 2040, with $96.3 million due within one year. The company expected fiscal 2022 capital expenditures of $30–$45 million. It paid $8.2 million in dividends, or $0.24 per share; future dividends remain at the board’s discretion.
Material changes, outlook and risks
- On April 25, 2021, Monro acquired 30 California stores from Mountain View Tire & Service for $62.1 million, funded through the credit facility. The acquired stores contributed $7.9 million of sales from acquisition through quarter-end; preliminary purchase accounting recorded $68.1 million of goodwill.
- Management described the prior-year comparison as including the pandemic-era low point in store traffic. It cautioned that demand remained volatile and that the pandemic’s longer-term effects could not be estimated with certainty. No specific sales or earnings guidance was provided in the supplied filing text.
- COVID-19 effects, consumer demand, supply-chain availability, labor and wage costs, competition, weather, acquisition integration, litigation, cybersecurity and interest-rate changes are among the disclosed risks.
- The parties reached an agreement in principle to settle the Cerini wage-and-hour case. A $3.9 million potential settlement charge was recorded; terms could change and settlement remained subject to court approval.
- Management stated that current funding sources were expected to provide adequate liquidity for the following 12 months and long term. It also expects positive operating cash flow, while noting that growth may be funded with credit-facility borrowings.
Important facts for investors to verify
- How much of the 34.5% comparable-store sales increase reflects recovery from the pandemic-affected comparison period, and whether traffic and average-ticket gains persist.
- Whether gross-margin improvement can continue amid technician labor pressure, staffing normalization and higher demand.
- Final purchase-price allocation, integration performance and returns from the Mountain View acquisition.
- Final terms and court approval of the Cerini settlement, and any resulting change to the recorded charge.
- Cash generation, acquisition and capital-spending needs, dividend capacity, covenant headroom and exposure to floating interest rates.
- The realized duration and financial effects of COVID-19, including potential supply, labor and customer-demand disruptions.