Monro, Inc. (Monro Muffler Brake, Inc.) — Fiscal 2016 Third-Quarter 10-Q
Reporting period: The quarter ended December 26, 2015 (13 weeks); year-to-date covers the 39 weeks ended that date. Comparisons are with the corresponding periods ended December 27, 2014. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Sales | $238.9; +1.0% | $714.6; +5.8% |
| Comparable-store sales | -2.5% | -0.3% |
| Gross profit / margin | $93.4 / 39.1% (prior: $90.2 / 38.1%) | $293.8 / 41.1% (prior: $269.7 / 39.9%) |
| Operating income / margin | $26.4 / 11.1% (prior: $28.0 / 11.8%) | $94.1 / 13.2% (prior: $86.3 / 12.8%) |
| Net income | $15.2; -4.7% | $52.9; +7.4% |
| Diluted EPS | $0.46 (prior: $0.49) | $1.59 (prior: $1.50) |
| Net interest expense | $3.9 (prior: $2.9) | $11.0 (prior: $7.8) |
Quarterly sales growth reflected $13.9 million from new stores, partly offset by lower comparable sales and $5.2 million from closed stores. Year-to-date new-store sales added $57.6 million, while closures reduced sales by $16.5 million. Acquisitions accounted for much of the new-store contribution.
Gross-margin improvement reflected lower material costs, including oil and tire costs; year-to-date benefits also included barter transactions. In the quarter, operating expenses rose to 28.0% of sales from 26.3%, in part due to $2.1 million of additional due-diligence costs, most related to an unsuccessful transaction. Year-to-date due-diligence costs increased $2.5 million. The quarter included a $0.7 million discrete tax benefit; excluding it, the effective tax rate would have been approximately 36.3% rather than 33.1%.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $81.7 million, versus $88.6 million. Capital expenditures were $28.8 million; acquisition cash outflow was $48.2 million. Investing cash outflow totaled $74.5 million.
- Cash declined $3.6 million from the fiscal-year start to $4.2 million. Dividends paid were $14.7 million; the company reported $77.0 million spent on capital requirements and expansion-related items.
- At December 26, 2015, total assets were $1.003 billion and shareholders’ equity was $524.1 million. Current assets were $189.8 million and current liabilities $161.3 million.
- Revolving-credit-facility debt was $127.4 million; capital leases and financing obligations totaled $172.6 million. The company reported $98.9 million of net availability under its then-current $250 million facility, after a $23.7 million letter of credit. It was in compliance with debt covenants.
- On January 25, 2016, the company entered a new five-year, $600 million revolving facility, with an accordion feature of up to an additional $100 million and an $80 million letter-of-credit subfacility. The filing says the new facility increases borrowing capacity; it does not state post-transaction availability.
Material developments, outlook and risks
- Fiscal 2016 acquisitions had aggregate consideration of $50.8 million, including $44.8 million cash and a $6.0 million seller payable. Preliminary purchase accounting recorded $46.1 million of goodwill. Acquired operations contributed $9.6 million of sales in the quarter and $15.6 million year-to-date from their respective acquisition dates. A one-store Georgia acquisition followed on January 31, 2016.
- Management attributed the quarter’s comparable tire-sales decline of approximately 4% mainly to milder winter weather. Comparable brakes and alignment sales increased approximately 2% and 6%, respectively. The company had 1,031 company-operated stores and 138 franchised locations at quarter-end.
- Management planned to continue store upgrades, expansion and acquisitions, and stated that operating cash flow and bank financing were expected to provide sufficient resources for planned business expansion over the next 12 months. The filing provides no specific earnings or sales guidance.
- The company intended to pay a regular quarterly dividend of $0.15 per common share or equivalent during fiscal 2016; future dividends remain subject to board discretion and restrictions.
- Risks identified include demand, competition and pricing, economic conditions, seasonality and weather, supply constraints, leverage and interest-rate changes, financing availability, acquisition integration and possible goodwill impairment, cybersecurity and data protection, regulation, and litigation.
- Monro guaranteed certain franchise-related lease payments with a maximum potential exposure of $11.0 million through April 2020 and recorded a $0.4 million liability for anticipated defaults. It reported ordinary-course claims and lawsuits and did not expect them to have a material adverse effect.
Key facts for investors to verify
- Whether comparable-store sales and tire demand recovered after the unusually mild winter, and how acquisition growth compares with underlying store performance.
- Whether operating-expense pressure, due-diligence costs and increased interest expense affected subsequent margins and earnings.
- Actual borrowing availability and covenant headroom under the new credit facility, alongside debt and lease-financing obligations.
- Final acquisition valuations and goodwill, and the possible impact of purchase-accounting adjustments or integration results.
- Whether the $0.7 million tax benefit and the stated dividend policy affect comparable earnings or future cash needs.