Monro, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2018, ended September 23, 2017. The quarter comprised 13 weeks; fiscal 2018 is a 53-week year ending March 31, 2018. Comparisons are with the equivalent fiscal 2017 periods. Financial statements are unaudited.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Sales | $278.0 million, up 13.0% | $556.5 million, up 15.6% |
| Gross profit / margin | $107.9 million / 38.8%, versus $100.0 million / 40.7% | $220.8 million / 39.7%, versus $198.1 million / 41.2% |
| Operating income / margin | $33.8 million / 12.2%, up 5.9% | $67.6 million / 12.1%, up 6.9% |
| Net income | $17.3 million, down 1.6% | $34.9 million, up 1.6% |
| Diluted EPS | $0.52, versus $0.53 | $1.05, versus $1.03 |
| Operating cash flow | $75.1 million for six months, versus $68.1 million |
Quarterly sales growth was primarily acquisition- and new-store-driven: new stores added $34.4 million, including $29.1 million from fiscal 2017 and 2018 acquisitions. Comparable-store sales declined 0.4%; excluding lost selling days from Hurricane Irma, they were flat. Six-month comparable-store sales rose 0.5%, or approximately 0.7% adjusted for the hurricane.
Gross margin pressure primarily reflected acquired commercial and wholesale tire operations, whose lower-margin sales mix reduced consolidated quarterly gross margin by approximately 250 basis points, compared with about 20 basis points in the prior-year quarter. Comparable-store gross margin improved approximately 40 basis points for the quarter and 70 basis points year to date, mainly from lower material costs. Quarterly operating expenses rose $6.0 million, mainly due to new stores and management-transition costs; expenses as a share of sales declined. Higher debt balances and interest rates increased quarterly net interest expense by approximately $1.6 million.
Cash, debt, and liquidity
- Cash was $6.4 million at September 23, 2017, down from $9.0 million at fiscal year-end.
- Six-month cash flow: $75.1 million from operations; $31.4 million used in investing, including $18.9 million of capital expenditures and $14.5 million for acquisitions; $46.3 million used in financing. Dividends paid were $12.0 million.
- Credit Facility borrowings were $153.0 million; net availability was $417.6 million. The company reported compliance with all debt covenants. Outstanding letters of credit were $29.4 million.
- Capital leases and financing obligations totaled $239.5 million. Total liabilities were $601.6 million. The filing identifies interest-rate exposure: a 1% LIBOR change would affect annual interest expense by approximately $1.5 million based on the period-end debt position.
Outlook, risks, and notable items
- Management said it expects adequate operating cash flow and bank financing to support planned expansion over the next 12 months and intends to continue pursuing acquisitions. No quantified earnings or sales guidance is provided.
- The company acquired stores for approximately $14.0 million in the first six months; these acquisitions added $3.6 million of sales from their respective acquisition dates through September 23. Acquisition purchase-price allocations were preliminary, and subsequent valuation adjustments could be material.
- Hurricane Irma temporarily closed 93 stores during the quarter; all had reopened by the filing. Management estimated the lost selling days affected comparable-store sales.
- Management cited risks including demand, competition and pricing, economic and weather conditions, vendor and parts supply, leverage and interest rates, technology and cybersecurity, litigation, and acquisition integration.
- New lease accounting rules were expected to materially increase reported balance-sheet assets and liabilities: approximately half of store leases and all land leases were then off balance sheet. The company was evaluating the impact.
- Monro guaranteed certain franchise-related lease payments, with a maximum potential obligation of $6.2 million through April 2020; a $0.5 million liability was recorded for anticipated defaults. Ordinary-course claims and lawsuits were not expected to have a material adverse effect.
- The board stated its intention to pay quarterly dividends of $0.18 per common share or equivalent in fiscal 2018, subject to future board decisions and applicable restrictions.
Important facts for investors to verify
- Whether comparable-store sales and traffic trends improved after the quarter; management reported lower traffic partly offset by higher average tickets.
- Whether acquisition-driven commercial and wholesale growth continues to dilute consolidated gross margins, and whether anticipated synergies materialize.
- How debt, capital-lease obligations, interest rates, and the October 3, 2017 credit-agreement amendment affect financing capacity and costs; amendment terms are not clear in the filing text provided.
- The final purchase-price allocations for recent acquisitions and the balance-sheet impact and implementation timing of the new lease standard.
- Future dividend decisions, which remain discretionary and subject to financial condition, capital needs, and credit-facility restrictions.