Monro, Inc. — Q1 Fiscal 2021 Form 10-Q
Reporting period: 13 weeks ended June 27, 2020; comparison is the quarter ended June 29, 2019. Monro operates automotive undercar repair and tire sales and service locations in the United States. The quarter was materially affected by COVID-19.
Financial results and liquidity
| Metric | Q1 FY2021 | Prior-year quarter |
|---|---|---|
| Sales | $247.1 million | $317.1 million |
| Comparable-store sales | Down 25.8% | — |
| Gross profit / margin | $87.5 million / 35.4% | $128.1 million / 40.4% |
| Operating income / margin | $11.4 million / 4.6% | $36.4 million / 11.5% |
| Net income | $3.0 million | $22.6 million |
| Diluted EPS | $0.09 | $0.67 |
| Operating cash flow | $72.5 million | $59.4 million |
| Capital expenditures | $15.3 million | $14.0 million |
Cash was $147.2 million at June 27, down from $345.5 million at March 28. The company used $255.7 million in financing activities, including $247.4 million of principal payments on debt, finance leases and financing obligations. Long-term debt was $326.2 million, compared with $566.4 million at quarter-end in March. Credit Facility net availability was $240.2 million; Monro reported compliance with its debt covenants at June 27. Finance leases and financing obligations were $384.0 million on the balance sheet.
Material changes and drivers
- Sales fell 22.1%, primarily reflecting pandemic-related lower traffic and reduced store hours; new-store sales partly offset the decline. Store traffic improved from early April, but comparable sales remained down 14% in June.
- Gross margin contracted 5.0 percentage points. Management cited a sales mix shift toward tires, lower vendor rebates from slower inventory turns, and reduced leverage on distribution and occupancy costs; lower labor costs partly offset these pressures.
- Operating expenses declined to $76.1 million from $91.8 million through cost controls and reduced staffing, partly offset by $2.5 million of store-closing costs. Monro closed 36 company-operated stores during the quarter and ended with 1,247.
- Reported adjusted net income was $5.1 million versus $23.4 million; adjusted diluted EPS was $0.15 versus $0.69. These are non-GAAP measures, principally adjusted for store-closing and initiative-related costs.
Outlook, risks and unusual items
Management provided no formal earnings or sales guidance and said recovery timing and the pandemic’s longer-term effects could not be estimated reliably. It reported comparable-store sales declines of 41% in April, 24% in May, 14% in June and 12% in July, while cautioning that the trend may not continue. As of July 31, cash was $143.3 million; during July, Monro repaid a further $19.9 million of Credit Facility borrowings. Management said available operating cash flow, cash and financing were expected to support operations for at least 12 months.
Actions included suspending non-critical capital spending and acquisitions, reducing store hours and labor, cutting operating costs, and negotiating rent deferrals and reductions. Rent reductions affecting approximately 20% of leases were exchanged for lease extensions and increased recorded lease assets and obligations. The June credit amendment changed covenant terms through the first quarter of FY2022, including a monthly minimum liquidity requirement of $275 million and revised leverage limits; it also restricted dividends and acquisitions subject to covenant compliance. Key risks include prolonged demand weakness, changing pandemic conditions, labor and safety costs, supply-chain disruption, and the possibility of covenant pressure or impairment if adverse effects persist.
Investor verification points
- Track comparable-store sales, traffic and the durability of the reported April-to-July improvement.
- Monitor gross margin recovery, particularly tire mix, vendor rebates and fixed-cost absorption.
- Reconcile cash, debt repayments and Credit Facility availability, and review compliance with amended liquidity and leverage covenants.
- Assess the continuing effects of store closures, lease concessions and associated lease obligations.
- Distinguish GAAP results from adjusted net income and adjusted EPS and review the stated adjustment items.