Monro, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended December 28, 2019 (13 weeks), and nine months ended December 28, 2019 (39 weeks). The comparable periods ended December 29, 2018. Monro operates in one segment, covering retail, commercial and wholesale locations.
Key financial results
| Metric | Quarter | Nine months |
|---|---|---|
| Sales | $329.3 million; up 6.2% | $970.5 million; up 6.3% |
| Comparable-store sales | Down 0.9% | Down 0.1% |
| Gross profit / margin | $124.4 million / 37.8% (prior: 38.0%) | $374.6 million / 38.6% (prior: 38.9%) |
| Operating income / margin | $31.6 million / 9.6% (prior: $30.7 million / 9.9%) | $101.3 million / 10.4% (prior: $98.3 million / 10.8%) |
| Net income | $18.9 million (prior: $20.5 million) | $61.8 million (prior: $62.9 million) |
| Diluted EPS | $0.56 (prior: $0.61) | $1.82 (prior: $1.87) |
| Adjusted diluted EPS (non-GAAP) | $0.60 (prior: $0.57) | $1.91 (prior: $1.88) |
| Operating cash flow | Not presented for the quarter | $124.7 million (prior: $128.6 million) |
Quarterly sales growth primarily reflected new stores: $22.7 million of additional sales, including $20.7 million from fiscal 2020 and 2019 acquisitions. Nine-month new-store sales contributed $59.9 million, including $51.4 million from those acquisitions. Lower comparable sales and sales lost to store closures partly offset growth. Milder winter weather reduced traffic in some markets; higher average tickets from improved in-store execution partly offset the impact. Comparable brakes and alignment sales each fell about 3% in the quarter; tires and front end/shocks each declined about 1%, while maintenance was relatively flat.
Cash, debt and liquidity
- Cash and equivalents were $8.8 million at December 28, 2019, versus $6.2 million at March 30, 2019. Total assets were $1.712 billion and total liabilities were $965.6 million.
- Nine-month investing cash outflow was $145.5 million, including $42.2 million of capital expenditures and $104.3 million for acquisitions, net of cash acquired. Financing cash inflow was $23.4 million; dividends paid were $22.3 million.
- Long-term debt was $197.0 million, compared with $137.7 million at March 30, 2019. Finance leases and financing obligations totaled $330.0 million. Operating lease liabilities were $207.1 million.
- The five-year revolving credit facility provides $600 million of capacity, with a potential $250 million accordion increase. At quarter-end, $197.0 million was outstanding, a $33.6 million letter of credit was outstanding, and net availability was $369.4 million. Monro reported compliance with all debt covenants.
- A 100-basis-point change in LIBOR would change annual interest expense by approximately $2.0 million based on the quarter-end debt position.
Material developments, outlook and risks
- Monro acquired businesses for an aggregate purchase price of $103.6 million during the first nine months, including a 40-store California chain and other locations. Acquired entities contributed $18.5 million of quarterly sales and $38.7 million of nine-month sales from their respective acquisition dates. Purchase-price allocations remain preliminary; goodwill recorded for these acquisitions was $108.7 million.
- Adoption of the lease accounting standard increased assets by $165.3 million and liabilities by $165.9 million at adoption, and reduced retained earnings by about $0.6 million. The filing says adoption did not materially affect reported income or cash flows.
- Management said it believes cash from operations and bank financing are sufficient to support planned business expansion for the next 12 months and intends to continue seeking acquisition candidates. No specific sales or earnings guidance was provided.
- Management attributed margin pressure primarily to higher labor costs, technician staffing and wage inflation, and distribution and occupancy costs. Lower material costs provided some offset.
- Fiscal 2018 comparison periods included a $2.0 million discrete tax benefit. The higher current-period effective tax rates contributed to lower GAAP net income and EPS despite sales and operating-income growth. Adjusted EPS excludes specified initiative, acquisition, realignment and tax items; it is a non-GAAP measure.
- Disclosed risks include demand and competition, weather and seasonality, parts supply and vendor dependence, tariffs and trade policy, interest-rate exposure and leverage, financing availability, acquisition integration and goodwill impairment, automotive technology changes, cybersecurity and data protection, and litigation. Monro reported no legal proceedings it expected to have a material adverse effect.
Important facts for investors to verify
- Whether comparable-store sales recover from the quarter’s decline and the nine-month near-flat result, including the effects of weather and category-level trends.
- Whether labor, occupancy and distribution cost pressures continue to weigh on gross and operating margins.
- Acquisition integration and performance, and whether preliminary asset, liability and goodwill valuations are revised materially.
- Debt, lease obligations, interest-rate sensitivity, covenant headroom and availability under the revolving facility.
- The assumptions and adjustments behind adjusted diluted EPS, and the sustainability of dividends and management’s stated 12-month liquidity outlook.