Monro Muffler Brake, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the 13-week quarter ended September 29, 2012 (fiscal Q2 2013) and the 26-week year-to-date period. Comparatives are the corresponding fiscal periods ended September 24, 2011. Monro operates automotive repair and tire stores; it reported 853 company-operated stores and three franchised locations at quarter-end.
Financial performance and liquidity
| Metric | Quarter | Six months |
|---|---|---|
| Sales | $176.5 million, up 1.9% | $345.7 million, up 2.2% |
| Gross profit / margin | $69.9 million / 39.6% | $138.0 million / 39.9% |
| Operating income / margin | $19.7 million / 11.2% | $39.4 million / 11.4% |
| Net income | $11.5 million, down 23.6% | $23.2 million, down 24.1% |
| Diluted EPS | $0.36, versus $0.47 | $0.72, versus $0.95 |
For the six months, operating cash flow was $29.6 million, versus $38.2 million. Capital expenditures were $12.1 million and acquisition spending was $57.5 million; investing activities used $66.6 million. Financing activities provided $35.7 million, and cash declined $1.3 million to $1.9 million.
At September 29, cash was $1.9 million, current assets were $152.0 million and current liabilities were $113.1 million. The company had $47 million drawn on its $175 million revolving credit facility, with $108 million net availability after outstanding letters of credit. It reported compliance with all debt covenants. Capital lease obligations were approximately $48.1 million. Other long-term debt was $47.8 million, compared with $5.7 million at March 31.
Material changes and management commentary
- Comparable-store sales declined 4.6% for the quarter and 5.9% for the six-month period. New-store sales contributed $15.4 million and $33.1 million, respectively, partly offsetting the comparable-store declines and closed-store sales.
- Management attributed weaker comparable sales mainly to a weak U.S. economy, low consumer confidence, high unemployment and the lingering effect of a mild winter. It said customers were deferring tire purchases and repairs, particularly higher-ticket work.
- Gross margin fell from 41.2% to 39.6% for the quarter and from 42.0% to 39.9% year to date. Management cited reduced leverage on distribution, occupancy and labor costs amid lower comparable sales, higher tire costs without equivalent price increases, and a shift in sales mix. Lower oil costs partly offset these pressures.
- SG&A rose to $50.1 million for the quarter and $98.6 million for the six months; as a share of sales it increased to 28.4% and 28.5%, respectively. Acquired stores accounted for $3.9 million of quarterly and $8.6 million of year-to-date expense increases; management said existing-store expenses were lower year to date.
- Completed fiscal 2013 acquisitions included 20 Virginia stores, 18 North Carolina stores, and 17 stores in Wisconsin and South Carolina. The approximately $57 million total purchase price was funded through the credit facility. Subsequent to quarter-end, Monro acquired six stores and signed an agreement to acquire 31 Tire Barn Warehouse stores, subject to closing. The 31-store chain reported approximately $60 million of prior-year sales based on unaudited historical information.
Outlook, risks and contingencies
No specific earnings or sales guidance was provided. Management said it believes available cash, operating cash flow and bank financing are sufficient for planned expansion over the next 12 months, and stated it intends to continue pursuing acquisitions. The board intended quarterly dividends of $0.10 per common share or equivalent, but future dividends remain at the board’s discretion and are subject to financial condition and credit-facility restrictions.
Risks identified include economic conditions and demand, competition and pricing, store renovation and capital needs, parts supply, leverage and interest rates, financing availability, acquisition integration, litigation, regulation, data protection and vendor rebates. Unrecognized tax benefits were $6.0 million, with approximately $0.8 million of related interest and penalties accrued; state tax audits were ongoing, and the possible effect of their conclusion could not be estimated. Management said ordinary-course legal claims were not expected to have a material adverse effect. Disclosure controls were deemed effective, with no material change in internal control reported.
Key facts for investors to verify
- Whether comparable-store sales and margins recover from the reported declines, and how much customer deferral persists.
- Acquisition integration, the economics and closing of the planned 31-store Tire Barn deal, and the effect of acquisition-related debt and goodwill.
- Revolver utilization, covenant headroom, interest-rate exposure and the company’s ability to fund expansion, capital spending and dividends.
- Progress and potential outcomes of tax audits and changes in unrecognized tax benefits.