Business context and reporting period
Monro, Inc. (then Monro Muffler Brake, Inc.) filed this Form 10-K for the 52-week fiscal year ended March 28, 2015. The company operates automotive undercar repair and tire-service stores in the United States. At year-end it had 999 company-operated stores, one franchised location and 14 dealer-operated stores across 25 states; company stores serviced about 5.5 million vehicles during the year.
The filing is annual, not a standalone quarterly report. Fiscal Q4 ended March 28, 2015.
Financial and operating performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Sales | $894.5 million | $831.4 million |
| Comparable-store sales | -1.4% | -0.5% |
| Gross profit / margin | $353.4 million / 39.5% | $320.0 million / 38.5% |
| Operating income / margin | $109.8 million / 12.3% | $95.3 million / 11.5% |
| Net income | $61.8 million | $54.5 million |
| Diluted earnings per share | $1.88 | $1.67 |
| Cash from operations | $126.3 million | $93.9 million |
| Capital expenditures | $34.8 million | $32.2 million |
| Cash and equivalents at year-end | $7.7 million | $1.2 million |
| Revolving credit facility debt | $122.5 million | $105.8 million |
| Capital leases and financing obligations | $142.1 million | $88.1 million |
Fiscal Q4 sales were $219.1 million, operating income $23.5 million, net income $12.6 million and diluted EPS $0.38. In the prior-year fourth quarter, those figures were $203.2 million, $21.4 million, $11.9 million and $0.36, respectively.
Net cash used in investing activities was $118.7 million, including $84.4 million for acquisitions. Financing activities used $1.1 million net; the company paid $16.8 million in dividends. Net working capital was $19.5 million, compared with $31.4 million a year earlier. Shareholders’ equity was $473.6 million.
Material changes versus the prior comparable period
- Sales increased 7.6%, chiefly from new and acquired stores; new stores contributed $78.8 million, including $70.5 million from fiscal 2014 and 2015 acquisitions. Comparable sales fell 1.4%, and closed stores reduced sales by $9.4 million.
- Net income rose 13.5% and diluted EPS rose 12.6%. Gross margin improved by 1.0 percentage point, primarily due to lower material costs, especially tires. Operating expenses increased to 27.2% of sales from 27.0%, reflecting lower comparable sales and higher due-diligence costs.
- Debt and interest expense increased as acquisition funding and capital leases grew. Net interest expense rose to $11.3 million from $9.5 million.
- The company added 92 stores and closed 46, including the 34 remaining BJ’s Wholesale Club locations. Year-end store count increased by 46 to 999.
- Operating cash flow increased to $126.3 million from $93.9 million. Acquisitions used $84.4 million of cash, compared with $27.5 million in the prior year.
Outlook, risks and unusual items
- Management planned approximately nine new greenfield stores in fiscal 2016 and intended to continue pursuing acquisitions. In April 2015, after year-end, Monro acquired the Car-X brand and franchising rights for 146 independently operated service centers.
- Management said it believed available operating cash flow and bank financing could support planned expansion. The $250 million revolving facility expires in December 2017; $122.5 million was drawn, net availability was $103.8 million, and the company reported compliance with all debt covenants at year-end. A 1% change in LIBOR would change annual interest expense by about $1.2 million at the reported debt position.
- Comparable-store traffic and average ticket were both slightly lower. Management attributed the decline primarily to continued weak economic conditions; harsh winter weather also hurt fourth-quarter sales through closures and reduced customer travel. Brakes, oil changes, front-end/shocks and alignments grew comparably, while tire, maintenance and exhaust sales declined.
- Key risks include intense price competition; economic, weather and mileage-driven demand; vendor concentration and international sourcing (the ten largest vendors represented about 79% of purchases, and approximately 32% of purchases were imported); acquisition integration and leverage; technician recruitment and retention; cybersecurity and data privacy; environmental and consumer-protection regulation; and litigation. Goodwill was $349.1 million; the annual impairment test found no impairment.
- Management did not believe pending litigation was material in aggregate based on information then available. The filing reports no material, extraordinary, unusual or infrequently occurring items in fiscal 2015’s fourth quarter.
- Fiscal 2015 acquisitions involved preliminary purchase-price allocations, including $79.3 million of goodwill; the company said valuation adjustments remained possible. The pension plan moved from a $0.3 million surplus to a $1.9 million deficit, including the effect of updated longevity assumptions.
- The board announced a quarterly dividend of $0.15 per share in May 2015, up from $0.13 in fiscal 2015. Cash dividends are subject to board discretion and a credit-facility limit of 50% of prior-year net income.
Important facts for investors to verify
- Whether comparable-store sales recover and whether the planned store growth and acquired locations achieve expected profitability.
- How acquisition spending, goodwill, financing obligations and revolving debt evolve, including covenant headroom and interest-rate exposure.
- Whether gross-margin improvement persists amid tire costs, tariffs, occupancy and distribution expenses, and the lower-margin tire sales mix.
- Final purchase accounting for fiscal 2015 acquisitions and subsequent Car-X transaction terms and financial contribution.
- Developments in litigation, environmental or cybersecurity exposures, and the pension deficit and related assumptions.