Monro, Inc. (Monro Muffler Brake, Inc.) — Q1 FY2017 10-Q
Reporting period: 13 weeks ended June 25, 2016; comparable quarter ended June 27, 2015. Interim results are unaudited and may not indicate full-year performance.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Sales | $236.9 million | $236.5 million | Up 0.2% |
| Gross profit / margin | $98.1 million / 41.4% | $99.7 million / 42.2% | Margin down 0.8 percentage points |
| Operating income / margin | $31.3 million / 13.2% | $33.6 million / 14.2% | Down 6.9% |
| Net income | $16.8 million | $18.8 million | Down 10.9% |
| Diluted EPS | $0.50 | $0.57 | Down 12.3% |
| Net cash from operations | $21.7 million | $31.6 million | Down $9.9 million |
Cost of sales rose to 58.6% of sales from 57.8%; SG&A was 28.2% of sales versus 28.0%. Net interest expense increased about $1.1 million year over year. The effective tax rate was 37.9%, compared with 38.0%.
Cash, debt and liquidity
- Cash was $4.7 million at June 25, 2016, versus $8.0 million at March 26, 2016. Operating cash flow was $21.7 million; capital expenditures were $8.2 million and acquisition payments, net of cash acquired, were $47.4 million.
- Borrowings under the revolving credit facility were $140.9 million, up from $103.3 million at March 26. Net availability under the $600 million facility was $432.6 million; $26.5 million of letters of credit was outstanding. The company reported compliance with all debt covenants.
- Capital leases and financing obligations totaled $192.3 million, including current and long-term portions. Long-term debt was $140.9 million.
- All debt was floating-rate at quarter end. A 1% change in LIBOR would change annual interest expense by approximately $1.4 million, based on the quarter-end debt position.
- The company paid $5.6 million in dividends, including a quarterly dividend of $0.17 per common share or equivalent.
Material changes and management commentary
- Comparable-store sales declined 6.9%, largely attributed by management to weak economic conditions and milder winter weather. New-store sales contributed $18.5 million, including $16.8 million from fiscal 2016 and fiscal 2017 acquisitions; closed stores reduced sales by $2.3 million.
- The company had 1,064 company-operated stores and 134 franchised locations at quarter end. It added 36 company-operated stores and closed one during the quarter.
- Management attributed lower consolidated gross margin to higher material costs as a share of sales, a mix shift from higher-margin service work to lower-margin tires, and acquisitions. Comparable-store gross margin increased 50 basis points, helped by lower material costs.
- Operating expenses increased as a percentage of sales primarily because of fixed costs against lower comparable-store sales. Management said expense dollars, before closed-store losses and acquired-store amortization, decreased slightly, reflecting cost control.
- Fiscal 2017 acquisitions cost $47.2 million and included 32 retail/commercial tire and automotive repair stores and one retread plant. Acquired entities contributed $8.9 million of sales from acquisition dates through June 25. Preliminary purchase accounting recorded $37.1 million of goodwill; valuations remain subject to refinement.
- After quarter end, Monro acquired six additional stores and reported definitive agreements for further store acquisitions expected to close during Q2 FY2017. These transactions were expected to be financed through the existing credit facility.
Outlook, risks and contingencies
- No quantified earnings or sales guidance was provided. Management said it believed available operating cash flow and bank financing were sufficient for planned expansion over the next 12 months and intended to continue pursuing acquisitions.
- Future dividends are discretionary and subject to financial condition, capital requirements, credit-facility restrictions and other factors. The facility limits cash dividends to 50% of prior-year net income.
- Risks identified include demand and competition, economic and weather conditions, seasonality, parts supply and foreign vendors, capital needs, leverage and interest-rate exposure, financing availability, technology changes, cybersecurity and personal-data protection, litigation, and acquisition integration and goodwill impairment.
- Monro guaranteed certain lease payments, primarily for franchisees, with maximum potential payments of $9.8 million through April 2020. It recorded a $0.7 million liability for anticipated defaults. The company said ordinary-course claims and lawsuits were not expected to have a material adverse effect.
- Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether comparable-store sales recover and whether the reported weakness persists beyond the effects of mild winter weather and economic conditions.
- Whether acquisitions deliver expected sales, synergies and returns, and how final purchase-price allocations affect goodwill, intangibles and liabilities.
- Whether increased borrowing and floating rates materially raise interest expense or constrain acquisition and dividend capacity.
- How margin performance develops, particularly the service-versus-tire sales mix and material-cost trends.
- Whether planned acquisitions close on schedule and are financed within facility terms and covenant limits.