Monro, Inc. (Monro Muffler Brake, Inc.) — Q1 FY2013 Form 10-Q
Reporting period: The 13-week quarter ended June 30, 2012 (April 1–June 30), compared with the 13-week quarter ended June 25, 2011. Financial amounts below are in millions unless noted.
Financial performance
| Metric | Q1 FY2013 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $169.2 | $164.8 | +2.6% |
| Comparable-store sales | -7.2% | Not stated | — |
| Gross profit / margin | $68.1 / 40.3% | $70.8 / 43.0% | Margin -2.7 percentage points |
| Operating income / margin | $19.7 / 11.6% | $26.1 / 15.9% | Income -24.7% |
| Net income / net margin | $11.6 / 6.9% | $15.4 / 9.4% | Income -24.6% |
| Diluted EPS | $0.36 | $0.48 | -25.0% |
| Operating cash flow | $18.8 | $28.9 | -$10.2 |
- Revenue growth reflected $17.7 million from new stores, partly offset by the 7.2% comparable-store sales decline and $1.8 million less sales from closed stores.
- Gross margin pressure reflected higher material, oil, and tire costs; selling prices did not rise enough to preserve margins. Management also cited lower-margin sales mix and reduced leverage on distribution and occupancy costs.
- SG&A rose to $48.4 million, or 28.6% of sales, from $44.7 million, or 27.1%. More than $4.1 million of the increase related to acquired stores and approximately $0.6 million to acquisition and due-diligence costs. Excluding those increases, comparable-store direct expenses fell $1.0 million and store-support costs fell about $0.2 million.
- Income tax provision was $6.8 million; the effective tax rate was 36.9%, versus 38.5%.
Balance sheet, cash flow, debt, and liquidity
- At June 30, 2012, cash was $1.1 million, total assets $562.9 million, total liabilities $224.9 million, and shareholders’ equity $338.1 million. Cash was $3.3 million at March 31, 2012.
- Operating activities provided $18.8 million; investing activities used $55.0 million, including $50.9 million for acquisitions and $7.0 million of capital expenditures. Financing activities provided $34.0 million. Cash decreased $2.2 million during the quarter.
- Other long-term debt was $42.6 million, up from $5.7 million at March 31, principally reflecting acquisition funding. The balance sheet also reported $3.5 million of current long-term debt and $45.6 million of capital-lease obligations. Management separately stated capital-lease financing of $49.1 million; the filing does not reconcile these figures.
- The five-year revolving credit facility is $175 million, with an option to request up to $75 million of additional availability. At quarter-end, $42 million was drawn, $18 million was committed to letters of credit, and net availability was $115 million. The company reported compliance with all debt covenants.
- Management said cash flow and bank financing were sufficient for planned expansion over the next 12 months. The facility includes dividend limits and specified interest- and rent-coverage requirements.
Material changes, outlook, and risks
- The company operated 836 stores and three franchised locations at June 30, compared with 802 company-operated stores and three franchised locations a year earlier. It added 38 stores and closed five during the quarter.
- Acquisitions completed in the quarter included 20 stores in Virginia and 18 in North Carolina, for an aggregate purchase price of approximately $51 million, financed through the bank facility. Certain acquired non-retail and heavy-truck operations were disposed of. Purchase-price allocations remained preliminary.
- After quarter-end, Monro signed an agreement to acquire 17 stores from Tuffy, expected to be financed through the bank facility. Those stores had approximately $9 million of unaudited prior-full-year sales. The filing also reports the board’s August 7 declaration of a $0.10-per-share quarterly dividend, payable September 20 to holders of record September 10.
- Management attributed weak comparable sales chiefly to the weak U.S. economy and low consumer confidence, which it believes led customers to defer tire purchases and repairs. It noted that safety needs and inspection requirements may limit how long purchases can be deferred. The filing provides no formal earnings or sales guidance.
- Risks identified include economic and demand conditions, competition and pricing, parts supply, store investment needs, leverage and interest rates, financing availability, acquisition integration, vendor rebates, litigation, regulation, and customer and employee data protection.
- Unrecognized tax benefits were $5.7 million at June 30, with approximately $0.7 million of related accrued interest and penalties. State audits and federal and state tax examinations remained open; the company could not estimate the effect of possible changes in uncertain tax positions.
- The company reported no legal proceedings beyond ordinary-course claims it believed would not materially affect its financial condition or results. Management concluded disclosure controls were effective and reported no material quarterly change in internal controls.
Important facts for investors to verify
- Whether comparable-store sales and margins recover, and whether the stated economic and customer-deferral factors persist.
- Acquisition integration, store-level results, final purchase-price allocations, and the financing and performance of the Tuffy transaction.
- Debt and lease obligations, revolver availability, covenant compliance, and the effect of further borrowing or interest-rate changes.
- Cash generation after acquisition spending and capital expenditures, and the board’s ability and discretion to continue quarterly dividends.
- Developments in tax audits and the potential effect of uncertain tax positions.