Monro, Inc. — Fiscal 2019 Third-Quarter Form 10-Q
Reporting period: Quarter and nine months ended December 29, 2018 (13 and 39 weeks, respectively); comparatives ended December 23, 2017. Monro operates tire and automotive repair stores, commercial and wholesale tire locations, and franchised locations. Figures below are unaudited; dollar amounts are in millions except per-share data.
Financial performance
| Metric | Quarter 2018 | Quarter 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $310.1 | $285.7 | $913.0 | $842.2 |
| Gross profit / margin | $118.0 / 38.0% | $107.0 / 37.4% | $355.2 / 38.9% | $327.8 / 38.9% |
| Operating income / margin | $30.7 / 9.9% | $29.3 / 10.3% | $98.3 / 10.8% | $96.9 / 11.5% |
| Net income | $20.5 | $11.6 | $62.9 | $46.5 |
| Diluted EPS | $0.61 | $0.35 | $1.87 | $1.39 |
| Operating cash flow | Not stated separately | Not stated separately | $128.6 | $97.1 |
- Quarter sales rose 8.5%; comparable-store sales increased 2.2%, or 3.3% adjusted for one fewer selling day. Nine-month sales grew 8.4%; comparable-store sales rose 2.4%, or 2.8% adjusted for selling days.
- Quarter gross margin improved 60 basis points, but operating margin fell 40 basis points as operating expenses grew faster than sales. Management said the quarter’s operating margin would have been 10.3% after adjusting for the holiday-related selling-day shift. Nine-month gross margin was unchanged, while operating margin declined 70 basis points; adjusted for selling days, the latter was 10.9%.
- Net income and EPS rose substantially year over year, but comparisons were affected by tax items in both periods. The current quarter’s 15.3% effective tax rate included a $2.0 million benefit from an IRS-accepted accounting-method change. The prior-year quarter’s 50.1% rate included a $5.3 million Tax Act deferred-tax expense, partly offset by a separate tax benefit.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $128.6 million. Capital expenditures were $30.8 million and acquisitions, net of cash acquired, used $46.1 million. Financing activities used $50.9 million, including $20.1 million of dividends. Cash increased $1.7 million to $3.6 million.
- At December 29, 2018, total assets were $1,267.1 million and shareholders’ equity was $686.1 million. Current assets were $222.3 million versus current liabilities of $212.6 million.
- Long-term debt was $119.9 million, compared with $148.1 million at March 31, 2018. Capital leases and financing obligations totaled $250.2 million, including current and long-term portions.
- The $600 million revolving credit facility had $119.9 million outstanding, $31.4 million in letters of credit, and $448.7 million net availability. Monro reported compliance with all debt covenants. Cash-flow exposure to a 1% LIBOR change was estimated at approximately $1.2 million in annual interest expense.
Changes, outlook and risks
- Growth reflected store additions and acquisitions as well as comparable-store gains. New stores contributed $19.8 million of quarterly sales growth and $54.0 million for the nine-month period; acquisitions contributed $14.3 million and $39.5 million, respectively.
- Fiscal 2019 acquisitions cost approximately $45.4 million and added $33.4 million of sales from their acquisition dates through December 29. Acquired commercial and wholesale locations added approximately $8.3 million of quarterly revenue but reduced consolidated gross margin by about 90 basis points due to lower-margin sales mix. Management cited staffing optimization and fixed-cost leverage as supporting the quarter’s gross-margin improvement.
- Operating expenses included costs for Monro.Forward initiatives and investments—$1.5 million in the quarter and $4.9 million year to date—as well as management realignment costs. The prior-year periods included litigation settlement and management-transition costs. Management provided no specific earnings or sales guidance in the filing; it said it believed resources were sufficient to fund planned expansion for the next 12 months and intended to continue seeking acquisitions.
- After quarter-end, Monro acquired 13 Florida stores, financed through its credit facility, and signed an agreement to acquire 12 Louisiana stores, expected to close in fiscal Q4 and also be financed through the facility.
- Key risks include demand and competition, weather and seasonality, vendor and parts availability, interest rates and leverage, acquisition integration, technology and data security, and rising import tariffs. Tariffs could raise tire costs or require price increases that weaken demand or competitiveness. Ordinary-course claims and lawsuits were not believed likely to have a material adverse effect.
- Monro expects adoption of the new lease standard to materially increase reported right-of-use assets and lease liabilities, including for store, land and other leases currently off balance sheet. The company’s accounting for the Tax Act was complete, with no material further adjustment recorded in this quarter.
Important facts for investors to verify
- Whether comparable-store momentum and operating-margin performance persist after adjusting for selling days and separating acquisition effects.
- How commercial and wholesale mix, tariff exposure, and cost or pricing changes affect gross margins and customer demand.
- Acquisition integration, final purchase-price allocations, and the financing and returns from recent and announced acquisitions.
- Future debt, interest expense, covenant capacity, and the impact of lease-standard adoption on reported liabilities and leverage measures.
- The sustainability of earnings growth given the current-period IRS tax benefit and unusual prior-year tax items; future dividends remain at the Board’s discretion and subject to restrictions.