Monro, Inc. (formerly Monro Muffler Brake, Inc.) — FY2017 Form 10-K
Reporting period: Fiscal year ended March 25, 2017 (52 weeks), compared with the year ended March 26, 2016. The filing also reports unaudited fourth-quarter results. The company operates automotive undercar repair and tire businesses in the U.S.; at year-end it had 1,118 company-operated stores, 114 franchised locations, five wholesale locations, two retread facilities and 14 dealer-operated stores.
Financial performance and liquidity
- Revenue: $1,021.5 million, up 8.3% from $943.7 million. Comparable-store sales fell 4.3%; management attributed the decline mainly to challenging customer economic conditions and unusually warm winter weather. New stores added $124.3 million in sales, including $102.5 million from FY2016 and FY2017 acquisitions.
- Profit and margins: Gross profit was $396.9 million, with gross margin of 38.9% versus 40.9%. Operating income was $116.4 million, down 3.5%, and operating margin was 11.4% versus 12.8%. Net income was $61.5 million, down 7.9%; diluted EPS was $1.85 versus $2.00. Net margin was 6.0% versus 7.1%.
- Margin drivers: Acquisition-related sales mix and lower comparable-store sales weighed on gross margin. Acquired commercial and wholesale locations contributed about $56.5 million of revenue and reduced consolidated gross margin by approximately 170 basis points. Operating expenses declined as a share of sales to 27.5% from 28.1%.
- Cash flow and investment: Operating cash flow was $129.9 million, versus $126.5 million. Capital expenditures were $34.6 million; operating cash flow less capital expenditures was approximately $95.3 million. Acquisitions used $142.6 million of cash. Cash at year-end was $9.0 million.
- Debt and liquidity: Revolver debt was $182.3 million and capital lease/financing obligations were $228.4 million. The $600 million revolving facility had $391.2 million of net availability; the company reported covenant compliance. Net working capital was $13.3 million. The filing estimates a 1% LIBOR change would alter annual interest expense by approximately $1.8 million, based on year-end floating-rate debt.
- Other metrics: Total assets were $1,185.3 million and shareholders’ equity was $581.3 million. Goodwill was $501.7 million; the company reported no goodwill impairment. Dividends paid totaled $22.5 million, or $0.68 per share for the year.
Material changes versus the prior period
- Sales growth was driven by acquisitions and store additions rather than comparable-store gains. Company-operated store count rose from 1,029 to 1,118, with 105 additions and 16 closures during FY2017.
- Gross margin contracted 2.0 percentage points, operating margin fell 1.4 points, and diluted EPS declined 7.5% despite higher total revenue.
- Net interest expense increased $4.2 million as average debt rose about $80 million, primarily to fund acquisitions and acquisition-related capital leases.
- Acquisition spending increased to $142.6 million from $49.0 million. FY2017 acquired locations generated $104.9 million in sales and an approximately $1.0 million net loss from their acquisition dates through year-end, including allocated corporate items.
- In the unaudited March quarter, sales were $252.0 million versus $229.0 million, while net income was $9.7 million versus $13.9 million and diluted EPS was $0.29 versus $0.42.
Outlook, risks and unusual items
- Management planned approximately 20–40 greenfield stores in FY2018 and expected to continue pursuing acquisitions. It stated that operating cash flow and bank financing should support planned expansion for the next several years; this is management’s expectation, not a guarantee.
- The board declared an intended quarterly dividend of $0.18 per share beginning in FY2018. The credit facility limits cash dividends to 50% of prior-year net income.
- Key risks include intense price competition; weak consumer demand, weather and seasonality; tire and oil cost changes; vendor concentration and foreign sourcing; skilled-technician availability and labor costs; leverage, interest-rate exposure and covenant compliance; integration and profitability of acquisitions; and environmental, litigation, cybersecurity and data-protection exposures.
- Operating leases totaled $154.2 million in future minimum commitments, net of sublease income. The company also guaranteed certain franchisee-related leases with a maximum potential exposure of $7.5 million and recorded a $0.6 million liability for anticipated defaults. Management did not expect existing litigation, in aggregate, to have a material adverse effect.
- No material, extraordinary, unusual or infrequent items were reported for the fourth quarter. The annual goodwill impairment test found no impairment. The auditor gave an unqualified opinion and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-store sales recover and whether FY2017’s revenue growth can translate into improved gross and operating margins.
- Acquisition performance, integration costs and returns on the $142.6 million invested; also verify the final purchase-price allocations, which remained preliminary at year-end.
- Debt trajectory, lease and financing obligations, covenant headroom and sensitivity to floating interest rates as expansion continues.
- Cash generation after capital expenditures, acquisition spending and dividends, including the sustainability of the planned store-opening pace.
- Exposure to self-insured claims, franchisee lease guarantees, unresolved legal matters and future lease-accounting changes, which management expected to materially increase reported balance-sheet assets and liabilities.