Monro, Inc. — Form 10-Q Summary
Business context and reporting period. Monro operates company-owned and franchised tire and automotive service locations. This unaudited filing covers the 13-week second quarter and 26 weeks ended September 24, 2016, compared with the periods ended September 26, 2015. Fiscal 2017 ends March 25, 2017.
Financial performance
| Metric | Quarter ended Sep. 24, 2016 | Quarter ended Sep. 26, 2015 | Six months ended Sep. 24, 2016 | Six months ended Sep. 26, 2015 |
|---|---|---|---|---|
| Sales | $248.6 million | $239.2 million | $485.5 million | $475.7 million |
| Comparable-store sales | -4.3% | — | -5.6% | — |
| Gross profit / margin | $100.0 million / 40.2% | $100.7 million / 42.1% | $198.1 million / 40.8% | $200.4 million / 42.1% |
| Operating income / margin | $31.9 million / 12.8% | $34.1 million / 14.3% | $63.2 million / 13.0% | $67.7 million / 14.2% |
| Net income | $17.5 million | $18.9 million | $34.3 million | $37.7 million |
| Diluted EPS | $0.53 | $0.57 | $1.03 | $1.14 |
| Net interest expense | $4.5 million | $3.8 million | $9.0 million | $7.2 million |
Sales grew 3.9% in the quarter and 2.1% year to date, chiefly from new stores and acquisitions, but negative comparable-store sales more than offset much of that growth. Management attributed the comparable-sales decline mainly to weak consumer spending and lingering effects of milder winter weather. Gross margin pressure reflected higher material costs, a mix shift from higher-margin services toward lower-margin tires, and acquisition impacts. Operating expenses declined as a percentage of sales, partly due to lower performance-based incentive compensation; management also cited cost control in comparable stores.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $68.1 million, versus $45.5 million in the prior-year period. Investing cash outflow was $147.5 million, including $129.5 million for acquisitions and $18.1 million of capital expenditures. Financing cash inflow was $78.6 million. Cash declined $0.8 million to $7.2 million.
- At September 24, 2016, total assets were $1.154 billion and shareholders’ equity was $563.5 million. Current assets were $201.0 million and current liabilities were $180.0 million.
- Long-term debt was $197.5 million, up from $103.3 million at March 26, 2016. Capital lease and financing obligations totaled approximately $198.9 million, including current and long-term portions. The filing attributes higher interest expense partly to increased borrowings and acquired-store lease debt.
- The $600 million revolving credit facility had $197.4 million outstanding, $26.5 million in letters of credit, and reported net availability of $376.1 million. Monro stated it was in compliance with all debt covenants.
- All debt was floating rate at quarter-end. A 1 percentage-point change in LIBOR was estimated to change annual interest expense by approximately $2.0 million based on the period-end debt position.
- Cash dividends paid during the six months were $11.2 million. The board indicated an intention to pay quarterly dividends of $0.17 per common share or equivalent in fiscal 2017; future declarations remain discretionary and subject to restrictions and other factors.
Material changes, outlook and risks
- Fiscal 2017 acquisitions cost an aggregate $129.1 million and included 70 acquired retail/commercial stores and one retread plant, plus four wholesale centers, as described in the filing. Acquired businesses contributed $16.7 million of sales in the quarter and $25.6 million in the six-month period from their respective acquisition dates. The purchase-price allocation was preliminary and included $85.9 million of goodwill.
- After quarter-end, Monro acquired three Ohio stores on October 2 and one Rhode Island store on October 16, financed through its existing credit facility. The company said it planned to continue seeking acquisitions and believed available operating cash flow and bank financing were sufficient for its plans over the next 12 months. No specific earnings or sales guidance was provided.
- Management cited risks including consumer demand, competition and pricing, weather and seasonality, vendor and parts availability, leverage and interest-rate changes, access to financing, acquisition integration and potential goodwill impairment, automotive technology changes, cybersecurity and data protection, regulation, and litigation.
- Monro guaranteed certain franchise-related lease payments with a maximum potential exposure of $9.1 million through April 2020; it recorded a $0.7 million liability for anticipated defaults. The company reported no material expected adverse effect from ordinary-course legal claims. Unrecognized tax benefits were $7.5 million, with approximately $0.5 million of related accrued interest and penalties.
- The filing states disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Key facts for investors to verify
- Whether comparable-store sales stabilize and whether acquisition-driven growth can offset continued weakness in existing stores.
- Whether gross margins recover from higher material costs and unfavorable service-versus-tire sales mix.
- Integration and performance of recent acquisitions, including final purchase-price allocations and the recoverability of acquisition-related goodwill.
- Debt growth, floating-rate exposure, covenant compliance, and the actual availability of revolving-credit capacity as acquisition spending continues.
- Future dividend decisions, franchise lease-guarantee exposure, and resolution of uncertain tax positions.