Monro, Inc. — Q2 FY2024 Form 10-Q
Reporting period: Quarter and six months ended September 23, 2023; comparisons are to the periods ended September 24, 2022. Financial statements are unaudited. Monro operates automotive repair and tire stores; at quarter-end it had 1,298 company-operated stores and 77 franchised locations.
Financial performance
Amounts below are in millions except per-share data and percentages.
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Sales | $322.1 | $329.8 | $649.1 | $679.4 |
| Gross profit | $115.0 | $116.7 | $229.4 | $238.9 |
| Gross margin | 35.7% | 35.4% | 35.3% | 35.2% |
| Operating income | $22.4 | $23.5 | $39.7 | $49.7 |
| Net income | $12.9 | $13.1 | $21.7 | $25.6 |
| Diluted EPS | $0.40 | $0.40 | $0.68 | $0.77 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $98.3 | $120.3 |
- Quarterly sales fell 2.3%, comparable-store sales fell 2.3%, and operating income declined 4.8%. Six-month sales declined 4.5% and operating income declined 20.2%.
- Quarterly gross margin rose 30 basis points, helped by lower retail material costs following pricing actions; higher technician labor and distribution and occupancy costs partly offset the benefit. Six-month margin increased 10 basis points.
- Adjusted diluted EPS, a non-GAAP measure, was $0.41 for the quarter versus $0.43, and $0.72 for six months versus $0.85. Adjustments include shareholder-related, back-office optimization, headquarters relocation, store closing, and other specified items.
Cash, debt, and liquidity
- Cash was $9.1 at September 23, 2023. The company reported $55.0 of long-term debt outstanding under its revolving credit facility and $514.9 of remaining availability; it was in compliance with debt covenants. The facility is scheduled to mature November 10, 2027.
- Six-month investing cash use was $6.7, including $15.7 of capital expenditures, partly offset by $7.3 of deferred divestiture proceeds. Financing cash use was $87.5, including $50.0 of net debt repayments, $19.6 of finance-lease principal payments, and $17.9 of dividends. No shares were repurchased.
- Working capital deficit was $224.5, versus $190.7 at fiscal year-end. Monro attributed the increase primarily to accounts payable and supplier participation in its supply-chain finance program. Eligible supplier obligations in accounts payable were $187.9, compared with $86.9 a year earlier; the filing says this amount is not necessarily equal to supplier receivables actually sold to financial institutions.
- Cash dividends were $0.28 per share for the quarter. The company said it intends to continue quarterly dividends, subject to Board discretion and relevant financial and contractual considerations.
Changes, outlook, and risks
- Management cited lower store traffic and inflation-related pressure on customer demand, including lower tire and higher-margin service demand. Approximately 300 small or underperforming stores contributed to an approximately one-percentage-point comparable-sales decline, according to the filing. Sales from closed stores also weighed on results; the six-month comparison included about $23.9 of prior-year sales from wholesale locations later sold.
- Fiscal 2024 capital expenditures are expected to be $35–$45. Management stated that available cash, operating cash flow, and credit-facility availability should provide adequate liquidity for the following 12 months and the long term; this is a forward-looking assessment, not a guarantee.
- The company expects inflation to continue affecting customers during the remainder of fiscal 2024. It also identified constrained labor availability, wage and interest-rate increases, possible economic slowdown or recession, and geopolitical uncertainty as potential pressures on costs and demand.
- Monro plans to sell its Rochester headquarters and relocate within the greater Rochester area; related relocation costs were incurred in the quarter. Assets associated with the planned sale were classified as held for sale at quarter-end.
- The 2022 sale of wholesale tire and internal distribution operations to ATD continues to generate earnout payments tied to tire purchases. Monro received $7.3 in the first half; $24.0 remained outstanding. After the earnout period, company-owned stores are generally required to source at least 90% of forecast requirements for specified tire categories from or through ATD, subject to stated supply exceptions.
- Shareholders approved changes to the Class C preferred-stock conversion terms, including a higher conversion rate and mandatory conversion by a sunset date no later than August 2026, and approved phased declassification of the Board. The amended conversion rate is 61.275 common shares per preferred share, versus 23.389 previously.
- The company disclosed ordinary-course legal proceedings and noted that an unfavorable outcome could materially affect results; the filing does not provide a clear quantified loss estimate. Floating-rate debt creates interest-rate exposure: a 100-basis-point SOFR change would affect annual interest expense by approximately $0.6 based on quarter-end debt.
Important facts for investors to verify
- Whether store traffic and comparable-store sales stabilize, and whether demand remains pressured by inflation.
- Whether margin gains from pricing and materials can offset wage inflation and fixed-cost deleverage.
- The sustainability of cash flow and liquidity, including the role of supplier-finance obligations in accounts payable and operating cash flow.
- Progress and costs associated with the headquarters sale and relocation, and timing of ATD earnout receipts and sourcing obligations.
- Potential dilution and governance implications of the Class C preferred-stock conversion changes.