Monro, Inc. (Monro Muffler Brake, Inc.) — Q1 FY2016 Form 10-Q
Reporting period: The 13 weeks ended June 27, 2015, compared with the 13 weeks ended June 28, 2014. Financial statements are unaudited; interim results are not necessarily indicative of the full year.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Sales | $236.5 million | $217.5 million | +8.7% |
| Gross profit / margin | $99.7 million / 42.2% | $90.0 million / 41.4% | Margin +0.8 percentage points |
| Operating income / margin | $33.6 million / 14.2% | $29.4 million / 13.5% | Operating income +14.3% |
| Net income | $18.8 million | $16.9 million | +11.0% |
| Diluted EPS | $0.57 | $0.52 | +9.6% |
| Net cash from operations | $31.6 million | $34.1 million | Down $2.5 million |
| Cash at quarter-end | $7.7 million | $2.3 million | Up from prior-year quarter |
Sales growth was driven largely by new stores: management attributed $25.2 million to new stores, including $23.1 million from fiscal 2015 acquisitions. Closed stores reduced sales by $6.1 million, while comparable-store sales declined 0.4%. Gross-margin improvement reflected lower material costs, particularly oil, reduced labor costs as a percentage of sales, and improved sales per labor hour. SG&A rose to $66.1 million, or 28.0% of sales, from $60.6 million, or 27.9%.
Balance sheet, debt and liquidity
- At June 27, 2015, total assets were $932.2 million and shareholders’ equity was $493.0 million.
- Revolving-credit-facility debt was $118.4 million, down from $122.5 million at March 28, 2015. Capital leases and financing obligations totaled approximately $140.1 million. The filing reports no fixed-rate debt outstanding.
- The $250 million revolving facility expires in December 2017. Net availability was $107.9 million after outstanding borrowings and letters of credit. The company was in compliance with its debt covenants.
- Management estimated that a 1% change in LIBOR would change annual interest expense by approximately $1.2 million. Net interest expense increased by about $1.3 million year over year, reflecting higher average debt and a roughly 50-basis-point increase in the average rate.
- Operating cash flow was $31.6 million; capital expenditures were $9.4 million and cash paid for acquisitions, net of cash acquired, was $15.2 million. Financing cash flow was negative $7.2 million, including $4.9 million of dividends.
Business changes, outlook and risks
- Monro had 999 company-operated stores and 146 franchised locations at quarter-end, versus 966 company-operated stores and one franchised location a year earlier. It added four company stores and closed four during the quarter.
- On April 25, 2015, Monro acquired the Car-X brand and franchise rights for 146 service centers. The acquisition’s operating results were immaterial for the quarter. Preliminary purchase accounting recorded $8.5 million of goodwill and $9.3 million of intangible assets.
- After quarter-end, Monro acquired four Massachusetts stores on July 12 and signed an agreement on July 17 to acquire 27 stores in Central New York and Pennsylvania, expected to close in Q2 FY2016. Both transactions were expected to be financed through the existing credit facility.
- Management said weak economic conditions continued to prompt consumers to defer repairs and tire replacements. Comparable-store traffic declined slightly; average ticket increased modestly. It plans to fund store upgrades, systems and expansion, including acquisitions, and said available operating cash flow and bank financing should support its current plans for the next 12 months. No earnings or comparable-sales guidance was provided.
- Key disclosed risks include demand and economic conditions, competition and pricing, parts supply, renovation and capital-spending needs, leverage and interest-rate exposure, financing availability, acquisition integration and potential goodwill impairment, litigation, and disruption or unauthorized access to computer systems and customer or employee data.
- Monro guaranteed certain primarily franchisee-related lease payments, with a maximum potential exposure of $18 million through February 2030; it anticipated no material defaults and recorded no liability. It also reported $7.9 million of unrecognized tax benefits, most of which would affect the effective tax rate if recognized. Management did not expect routine legal claims to have a material adverse effect.
Most important facts for investors to verify
- Whether comparable-store sales recover from the 0.4% decline, given management’s comments about deferred consumer spending.
- Whether acquisition-driven growth produces sustainable comparable-store and per-share gains after integration costs and higher interest expense.
- Facility availability, covenant headroom and sensitivity to floating interest rates as planned acquisitions and capital spending proceed.
- Final purchase-price allocations and performance of Car-X and the post-quarter acquisitions; the filing says some acquisition valuations remain preliminary.
- The sustainability of gross-margin improvements and the quarterly $0.15 dividend, which remains subject to board discretion and credit-facility restrictions.