Monro, Inc. — Q1 Fiscal 2020 Form 10-Q
Business context and reporting period. Monro operates automotive repair, tire sales and service businesses as one operating segment. This unaudited quarter covered 13 weeks ended June 29, 2019; the comparable quarter ended June 30, 2018.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Sales | $317.1 million | $295.8 million | +7.2% |
| Gross profit / margin | $128.1 million / 40.4% | $117.2 million / 39.6% | Margin +0.8 percentage points |
| Operating income / margin | $36.4 million / 11.5% | $33.1 million / 11.2% | Operating income +10.0% |
| Net income | $22.6 million | $20.6 million | +9.5% |
| Diluted earnings per share | $0.67 | $0.62 | +8.1% |
| Operating cash flow | $58.2 million | $50.2 million | +$8.0 million |
Comparable-store sales increased 0.8%. Revenue growth also reflected $19.6 million from new stores, including $16.6 million from fiscal 2020 and fiscal 2019 acquisitions. The company had 1,251 company-operated stores and 98 franchised locations at quarter-end.
Cash was $8.5 million at June 29, 2019, compared with $6.2 million at March 30, 2019. Investing cash outflow was $68.6 million, including $54.7 million for acquisitions and $14.0 million of capital expenditures. Financing provided $12.7 million; dividends paid were $7.4 million.
Material changes and management commentary
- Gross margin improved primarily due to lower material costs, better attachment of higher-value service packages, labor-cost discipline and leverage on distribution and occupancy costs. Management said comparable-store gross profit margin rose approximately 140 basis points.
- Lower traffic partially offset higher average tickets. Comparable sales rose in brakes (approximately 6%), alignment (2%) and tires (1%); maintenance and front-end/shocks declined approximately 2% and 1%, respectively.
- Acquired commercial and wholesale locations added approximately $4.5 million of quarterly sales but reduced consolidated gross margin by about 50 basis points due to their lower-margin sales mix. Operating expenses increased $7.6 million, primarily reflecting additional stores.
- During the quarter, Monro acquired 40 California stores and a distribution center, two additional California stores, and 12 Louisiana stores acquired March 31, for an aggregate fiscal 2020 purchase price of $54.5 million. Acquired businesses contributed $7.1 million in sales from their respective acquisition dates. The preliminary purchase accounting included $61.3 million of goodwill.
Debt, liquidity and accounting
In April 2019, Monro entered a new five-year, $600 million revolving credit facility, with an option to request up to $250 million of additional capacity. At quarter-end, $160.0 million was outstanding, a $33.6 million letter of credit was outstanding, and net availability was $406.4 million. The company reported compliance with all debt covenants.
Finance leases and financing obligations totaled $286.6 million. The new lease accounting standard, adopted March 31, 2019 without restating prior periods, brought operating lease assets and liabilities onto the balance sheet. It increased total assets by $165.3 million and liabilities by $165.9 million at adoption and produced an approximately $0.6 million after-tax cumulative adjustment to retained earnings. The company reported $201.4 million of operating lease assets at June 29, 2019.
Management said available operating cash flow and bank financing were sufficient for planned business expansion over the next 12 months. The board stated its intention to pay a regular quarterly dividend of $0.22 per common share or equivalent in fiscal 2020; future declarations remain discretionary. Eight Louisiana store acquisitions were under agreement after quarter-end and expected to close in fiscal Q2, financed through the existing credit facility.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management plans to continue pursuing suitable acquisitions and investing in facilities, systems and store expansion. Risks identified include demand and competition, economic conditions, seasonality and weather, pricing, vendor and parts availability, trade policies and tariffs, interest-rate exposure and leverage, acquisition integration, technology and cybersecurity disruptions, litigation, and availability of financing.
Monro disclosed ordinary-course claims and lawsuits that it did not believe would materially adversely affect its financial condition or results. It reported $6.7 million of unrecognized tax benefits at quarter-end, most of which would affect the effective tax rate if recognized. Management concluded disclosure controls were effective and reported no materially significant change in internal controls during the quarter.
Important facts for investors to verify
- Whether comparable-store sales and traffic trends improve, given the quarter’s 0.8% comparable-store growth and lower traffic.
- How acquisition integration, purchase-price allocations and lower-margin commercial and wholesale sales affect future margins and returns.
- Debt, lease obligations, interest-rate sensitivity and covenant headroom as expansion and acquisition spending continue.
- Whether cash flow supports planned capital investment and the intended $0.22 quarterly dividend.