Monro, Inc. (Monro Muffler Brake, Inc.) — Form 10-Q
Period: Second quarter and first six months of fiscal 2015, ended September 27, 2014; comparative periods ended September 28, 2013. The quarter and six-month periods were 13 and 26 weeks, respectively. Monro operates tire and automotive repair stores.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Sales | $221.3 million, up 7.8% | $438.8 million, up 6.6% |
| Comparable-store sales | Down 2.0% | Down 0.6% |
| Gross profit / margin | $89.5 million / 40.4%, versus 39.8% | $179.5 million / 40.9%, versus 39.0% |
| Operating income / margin | $28.9 million / 13.1%, versus 11.6% | $58.3 million / 13.3%, versus 11.4% |
| Net income | $16.3 million, up 19.6% | $33.3 million, up 22.2% |
| Diluted EPS | $0.50, up 19.0% | $1.01, up 20.2% |
All dollar amounts are U.S. dollars. Sales growth primarily reflected new stores and acquisitions, while comparable-store sales declined. Management attributed the comparable-store weakness mainly to consumers deferring vehicle repairs amid continued weak economic conditions. Tire, shocks, exhaust and maintenance categories declined comparably in the quarter; brakes, alignments and oil changes increased.
Cash flow, debt and liquidity
- Six-month operating cash flow was $54.7 million, compared with $46.9 million a year earlier. Inventory and other current assets used cash; increased trade payables provided cash.
- Investing cash outflow was $82.7 million, including $64.2 million for acquisitions and $18.7 million of capital expenditures. Financing provided $34.6 million; cash increased $6.6 million to $7.8 million.
- At September 27, 2014, current assets were $197.8 million and current liabilities $158.4 million. Long-term debt was $151.0 million, with $9.3 million of current debt and lease/financing obligations. Capital leases and financing obligations totaled $136.9 million.
- The $250 million revolving credit facility had $151.0 million outstanding, a $23.7 million letter of credit, and reported net availability of $75.3 million. Monro reported compliance with all debt covenants.
- Floating-rate exposure was material: a 1% change in LIBOR was estimated to change annual interest expense by approximately $1.5 million, based on the period-end debt position. The company paid $8.4 million in dividends during the six months, including quarterly dividends of $0.13 per common share or equivalent.
Material changes and unusual items
- Fiscal 2015 acquisitions included 35 stores in Florida, 19 in Michigan and two in New Hampshire. A further nine-store Georgia acquisition closed September 28, one day after quarter-end. Acquisitions were financed through the credit facility; period acquisitions added $64.2 million of goodwill, and purchase-price allocations remained preliminary.
- At September 27, the company had 1,003 company-operated stores and one franchise location, versus 940 company-operated stores and three franchises a year earlier. It added 61 and closed 11 stores year to date.
- A $2.9 million bulk sale of slower-moving inventory for barter credits reduced quarterly gross margin by 0.3 percentage points; management said the transaction’s margin was typically below normal. Excluding fiscal 2014 and 2015 new stores, quarterly gross margin improved 130 basis points year over year.
- Quarterly interest expense increased about $0.7 million year over year, mainly due to higher average debt associated with acquisitions and higher recorded lease debt. Management said purchase-accounting adjustments affected the comparative interest-rate figures.
Outlook, commentary and risks
Monro gave no specific earnings or sales guidance. Management said it believed cash flow and bank financing were sufficient for planned business expansion over the next 12 months and intended to continue seeking acquisitions. Capital priorities include store upgrades, systems and expansion. Future dividends remain at the board’s discretion and are subject to financial condition, capital needs and credit-facility restrictions.
Disclosed risks include demand and economic conditions, competition and pricing, supply constraints, regulation, leverage and interest-rate sensitivity, access to financing, acquisition integration and potential goodwill impairment, litigation, and computer-system and personal-data security. The company reported ordinary-course legal claims that it did not expect to have a material adverse effect. Disclosure controls were deemed effective, with no material quarter changes to internal control over financial reporting.
Unrecognized tax benefits were $6.2 million at quarter-end, most of which would affect the effective tax rate if recognized; tax examinations remained possible for federal fiscal 2011–2013 and various state years. The filing reported no material anticipated effect from new discontinued-operations guidance; the effect of forthcoming revenue-recognition guidance was still under evaluation.
Investor verification priorities
- Check whether comparable-store sales recover and whether the repair-category mix described by management persists.
- Assess acquisition contribution, integration, preliminary purchase accounting and goodwill growth, including the post-quarter Georgia acquisition.
- Monitor inventory and other working-capital cash use, capital spending, and the sustainability of operating cash flow.
- Track debt, lease obligations, revolving-facility availability, covenant headroom and floating-rate interest sensitivity.
- Verify whether the $0.13 quarterly dividend continues and whether future expansion remains consistent with liquidity and leverage.