Business context and reporting period
Monro Muffler Brake, Inc. (Monro) filed this unaudited Form 10-Q for the 13-week third quarter and 39 weeks ended December 27, 2014, compared with the corresponding periods ended December 28, 2013. Fiscal 2015 ends March 28, 2015. Monro operates tire and automotive repair stores; at quarter-end it had 1,017 company-operated stores and one franchise location.
Financial performance
Amounts below are in millions except per-share data. Margins are percentages of sales.
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Sales | $236.6 | $216.7 | $675.4 | $628.2 |
| Gross profit / margin | $90.2 / 38.1% | $82.3 / 38.0% | $269.7 / 39.9% | $243.0 / 38.7% |
| Operating income / margin | $28.0 / 11.8% | $26.9 / 12.4% | $86.3 / 12.8% | $73.9 / 11.8% |
| Net income | $16.0 | $15.3 | $49.2 | $42.6 |
| Diluted EPS | $0.49 | $0.47 | $1.50 | $1.31 |
- Quarterly sales rose 9.2%; nine-month sales rose 7.5%. Growth was primarily attributable to new stores and acquisitions, while comparable-store sales declined 1.8% and 1.0%, respectively.
- Quarterly operating income increased 3.8%, but operating margin fell 0.6 percentage points, reflecting higher operating expenses as a share of sales. Nine-month operating income increased 16.7% and margin improved 1.0 percentage point.
- For the nine months, cash from operations was $88.6 million, investing cash outflow was $108.8 million (including $26.5 million of capital expenditures and $82.7 million of acquisition spending), and financing cash inflow was $23.6 million. Cash increased $3.4 million to $4.6 million. Operating cash flow less capital expenditures was $62.1 million, calculated from reported amounts.
Balance sheet, debt and liquidity
At December 27, 2014, cash was $4.6 million, current assets were $184.6 million, and current liabilities were $155.4 million. Total assets were $909.3 million and shareholders’ equity was $458.4 million. Long-term debt was $146.5 million, with $8.6 million of current debt, capital leases and financing obligations; capital leases and financing obligations totaled approximately $136.3 million including current amounts. Debt and lease obligations increased in part because of acquisitions.
Monro reported $146.5 million outstanding under its $250 million revolving credit facility, $23.7 million of standby letters of credit, and $79.8 million of net availability. It was in compliance with debt covenants. The facility expires in December 2017. Management said cash flow and bank financing should provide sufficient resources for planned expansion over the next 12 months. A 1% LIBOR change was estimated to affect annual interest expense by approximately $1.5 million.
Material changes, outlook and risks
- Monro acquired stores in Florida, Michigan, Georgia, New York and New Hampshire during the nine-month period. Acquired entities contributed $29.5 million of sales from their respective acquisition dates through December 27. Acquisition cash spending was $82.7 million; preliminary purchase accounting recorded $75.9 million of goodwill and a $0.4 million bargain-purchase gain. Valuations remained preliminary and could be adjusted.
- On January 28, 2015, Monro signed an agreement to acquire eight Florida stores from Martino Tire Stores, expected to close in fiscal Q4 and be funded through the existing credit facility. Monro also said it would continue seeking acquisitions.
- Management attributed weak comparable sales mainly to economic conditions and customers deferring vehicle repairs. Tire, shocks, exhaust and oil-change comparable sales declined in Q3, while brakes and alignments increased.
- Material costs fell as a percentage of sales, particularly due to lower tire costs and a greater mix of lower-cost direct-import tires. Operating expenses increased as a percentage of sales in Q3, partly because of lower comparable sales and expenses from new stores.
- Bulk sales of slower-moving inventory to a barter company totaled $2.1 million in Q3 and $5.0 million year to date; no similar transactions occurred in the comparable prior-year periods. Management said the Q3 transaction reduced gross margin by 0.2 percentage points.
- No specific earnings or sales guidance was provided. Key disclosed risks include consumer demand, competition and pricing, acquisition integration and goodwill impairment, leverage and interest-rate changes, access to financing, supply constraints, capital needs, systems and data security, regulation and litigation. The company said ordinary-course legal claims were not expected to have a material adverse effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
- The Board’s stated fiscal 2015 quarterly dividend was $0.13 per common share or equivalent; future dividends remain at the Board’s discretion and subject to financial, covenant and other considerations.
Important facts for investors to verify
- Whether comparable-store sales recover, given declines in both the quarter and year-to-date period, and how much reported growth depends on acquired stores.
- Integration progress and final purchase-price allocations for recent acquisitions, including the substantial goodwill recorded and potential valuation adjustments.
- Debt, lease obligations, floating-rate exposure, facility availability and ongoing covenant compliance as expansion continues.
- The economics and accounting treatment of barter inventory sales, and whether similar transactions recur.
- Closing and financing of the announced eight-store Florida acquisition, and the Board’s future dividend decisions.