Monro, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended March 27, 2021 (52 weeks), compared with the year ended March 28, 2020. Although the request metadata says “2020 Q4,” this filing is the company’s annual report for fiscal 2021. Monro operates retail tire and automotive repair stores in one reported segment. It had 1,263 company-operated stores, 96 franchised locations, and serviced approximately 4.8 million vehicles during the year.
Financial performance and liquidity
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $1,125.7 million | $1,256.5 million | Down 10.4% |
| Comparable-store sales | — | — | Down 11.1% |
| Gross profit | $395.2 million | $476.7 million | Down 17.1% |
| Gross margin | 35.1% | 37.9% | Down 2.8 percentage points |
| Operating income | $72.2 million | $101.7 million | Down 29.0% |
| Net income | $34.3 million | $58.0 million | Down 40.9% |
| Diluted EPS | $1.01 | $1.71 | Down 40.9% |
| Adjusted diluted EPS (non-GAAP) | $1.14 | $2.00 | Down 43.0% |
| Operating cash flow | $184.9 million | $121.3 million | Up 52.3% |
Cost of sales was $730.5 million; operating, selling, general and administrative expenses were $323.0 million. Net interest expense was $28.2 million, approximately flat year over year. The effective tax rate was 22.3%, versus 21.9%.
Cash and equivalents were $30.0 million at year-end, down from $345.5 million. The company generated $184.9 million from operations, spent $51.7 million on capital expenditures and $17.2 million on acquisitions, and paid $29.8 million in dividends. It repaid the $350 million precautionary borrowing taken in March 2020. Long-term debt was $190.0 million; $376.4 million remained available under the $600 million revolving credit facility, and the company reported covenant compliance. The filing states it expected to fund operations and planned capital spending for at least the next 12 months.
Lease obligations are substantial: the balance sheet reported $404.1 million of finance lease and financing obligations and $208.6 million of operating lease liabilities. Undiscounted future lease commitments were $516.6 million and $239.5 million, respectively.
Material changes and management commentary
- COVID-19-related lower traffic, reduced store hours, and weaker demand drove the sales decline. Lower traffic was partly offset by higher average ticket. Comparable tire sales fell about 3%, while comparable maintenance and front-end/shock sales fell about 19%; brakes declined about 24% and alignment about 13%.
- Gross margin contracted mainly because of higher material costs and a sales mix shift toward tires, as well as weaker leverage on distribution and occupancy costs. Better technician labor productivity partly offset these pressures. Management said its tire pricing and category-management rollout improved gross profit per tire.
- OSG&A fell $52.0 million, reflecting cost reductions, reduced staffing and marketing expenses, fewer impairment charges, and closed stores; new-store expenses partly offset the savings.
- Cash flow from operations increased despite lower earnings, supported in part by working-capital movements, including lower inventory and changes in other assets and liabilities.
- The company acquired 17 California stores in December 2020 and, after year-end, acquired 30 additional California stores on April 25, 2021. It completed transformation work at 147 stores in FY2021 and said 366 stores had been transformed since the program began.
Outlook, risks, contingencies, and unusual items
The filing gives no specific earnings or revenue guidance. Management reported that comparable-store sales improved from the April 2020 low and provided recent year-over-year monthly trends from April 2020 through April 2021, ranging from a 41% decline to a 76% increase. It cautioned that these trends may not continue and that the timing or extent of recovery to pre-pandemic levels was uncertain. Management expected ongoing health-and-safety costs and possible labor inefficiencies, including challenges recruiting enough employees to meet demand.
- Key uncertainties include the pandemic’s effect on customer traffic and spending, supply-chain disruption, labor availability and wage inflation, tariffs and import costs, competition and pricing, seasonality and miles driven, and changing automotive technology, including electric vehicles.
- Other material risks include debt-covenant compliance and access to liquidity, store and acquisition integration, goodwill or other asset impairment, cybersecurity and data privacy, environmental and employment regulation, and potential litigation.
- A former store manager filed a putative collective and class action alleging unpaid overtime and improper deductions from store managers’ pay. Monro disputes the claims and plans to defend itself; the ultimate outcome is uncertain.
- Rent deferrals and negotiated rent reductions helped cash management. Rent reductions on approximately 23% of lease contracts involved term extensions and remeasurement, increasing recorded lease assets and liabilities. FY2021 adjusted earnings exclude specified items, including store-closing, Monro.Forward, acquisition, management-transition, and litigation-reserve items; adjusted measures are non-GAAP.
- Michael T. Broderick became President and CEO on April 5, 2021. The board declared a $0.24-per-share dividend in May 2021. The auditor issued unqualified opinions on the financial statements and internal control; management also concluded controls were effective.
Important facts for investors to verify
- Whether sales, store traffic, and margins recovered sustainably after the reported pandemic-related declines, rather than reflecting temporary comparisons or monthly volatility.
- Whether the improved operating cash flow is repeatable, given working-capital changes, and how cash generation compares with capital spending, dividends, acquisitions, and lease obligations.
- The company’s debt and lease burden, available revolver capacity, covenant headroom, and sensitivity to floating interest rates; Monro estimated a 100-basis-point LIBOR change would alter annual interest expense by about $1.9 million.
- The return on store transformations, technology investments, and the California acquisitions, including the 30-store post-year-end acquisition.
- Developments in the wage-and-hour litigation and any resulting legal, insurance, or reputational exposure.
- Whether ongoing labor, supply, tariff, and pandemic-related costs can be offset without weakening customer demand or margins.