Monro, Inc. Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months of fiscal 2014, ended September 28, 2013. Fiscal 2014 is a 52-week year ending March 29, 2014. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Quarter ended Sep. 28, 2013 | Prior-year quarter | Six months ended Sep. 28, 2013 | Prior-year six months |
|---|---|---|---|---|
| Sales | $205.3 | $176.5 | $411.5 | $345.7 |
| Gross profit / margin | $81.7 / 39.8% | $69.9 / 39.6% | $160.6 / 39.0% | $138.0 / 39.9% |
| Operating income / margin | $23.9 / 11.6% | $19.7 / 11.2% | $47.0 / 11.4% | $39.4 / 11.4% |
| Net income | $13.7 | $11.5 | $27.2 | $23.2 |
| Diluted EPS | $0.42 | $0.36 | $0.84 | $0.72 |
| Operating cash flow | Not separately reported for the quarter | $46.9 | $29.6 |
- Quarterly sales rose 16.3%; six-month sales rose 19.0%. Growth was driven mainly by acquired and other new stores, while comparable-store sales fell 2.1% in the quarter and 0.5% year to date.
- Quarterly net income increased 18.2% and diluted EPS 16.7%; six-month net income increased 17.4% and diluted EPS 16.7%.
- Quarterly gross margin improved 0.2 percentage points, but the six-month margin declined 0.9 points. Management attributed the year-to-date pressure principally to higher material costs and a sales mix weighted toward lower-margin tires.
- Operating cash flow was $46.9 million. Investing used $30.9 million, including $13.9 million of capital expenditures and $17.0 million for acquisitions. Financing used $15.5 million; cash increased $0.6 million to $2.1 million.
Balance sheet and liquidity
- At September 28, 2013, total assets were $734.4 million, total liabilities $343.2 million, and shareholders’ equity $391.2 million.
- Cash was $2.1 million; current assets were $169.9 million and current liabilities $139.2 million.
- Long-term debt was $119.4 million, plus $5.2 million current debt and approximately $65.1 million in capital leases and financing obligations. Long-term debt declined from $127.8 million at fiscal year-end.
- The $250 million revolving credit facility had $119 million outstanding, a $23 million letter of credit, and reported net availability of $108 million. The facility expires in December 2017. Monro reported compliance with all debt covenants.
- A 1% change in LIBOR was estimated to change annual interest expense by approximately $1.2 million based on the September 28 debt position.
Changes, outlook, and risks
- Monro operated 940 company stores and three franchised locations, compared with 853 company stores and three franchised locations a year earlier. It added 12 stores and closed six during the quarter; year to date it added 13 and closed ten.
- Management said weak economic conditions and consumers deferring vehicle repairs contributed to comparable-sales declines. Comparable tire sales and scheduled maintenance declined in the quarter, while exhaust, shocks, oil changes, and brake services increased.
- Management cited improved labor productivity, cost control, and leverage on distribution, occupancy, and other largely fixed costs. Acquired-store mix and related expenses affected margins and operating costs.
- Monro acquired 10 Washington, D.C.-area stores in August, and reported two North Carolina store acquisitions completed October 20. Agreements to acquire another 10 stores were expected to close in fiscal third quarter. Recent and planned acquisitions are to be financed through the existing credit facility. Management said available operating cash flow and bank financing should be sufficient for planned expansion over the next 12 months; no earnings or sales guidance was provided.
- Risks identified include weak demand, competition and pricing, parts supply, automotive technology and regulation, capital spending needs, leverage and interest-rate exposure, financing availability, acquisition integration and goodwill impairment, litigation, and cybersecurity and personal-data risks.
- State tax audits covering fiscal 2007–2010 may conclude within 12 months, but the possible financial effect could not be estimated. Unrecognized tax benefits were $5.5 million, with approximately $0.4 million of accrued interest and penalties. The company said ordinary-course legal claims were not expected to have a material adverse effect.
- The board’s stated quarterly dividend was $0.11 per common share or equivalent; future payments remain discretionary and subject to financial, covenant, and other considerations. Disclosure controls were assessed as effective, with no material quarter-end change in internal control reported.
Key facts for investors to verify
- Whether comparable-store sales recover and whether growth remains dependent on acquisitions and new stores.
- Whether tire-heavy sales mix and material costs continue to pressure gross margin, particularly year-to-date performance.
- Debt, lease obligations, revolver availability, interest-rate exposure, and capacity to fund acquisitions, capital spending, and dividends.
- Integration and purchase-accounting outcomes for recent acquisitions, including any material changes to acquired asset values or goodwill.
- Developments in state tax audits and any resulting change in uncertain tax positions.