MNRO

MONRO, INC. - 10-Q Filing Summary

Business Context and Reporting Period

Company: MONRO MUFFLER BRAKE, INC.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and six months ended September 25, 2010 (Fiscal 2011 Q2).
Business Overview: The Company operates 783 company-operated stores and three franchised locations as of September 25, 2010, providing automotive repair and tire services. The Company utilizes a 52/53-week fiscal year ending on the last Saturday in March.

Key Financial Metrics

Material Changes vs. Prior Period

• Sales Growth: Sales increased 18.6% for the quarter and 21.0% for the six months compared to the prior year. This was driven by a 6.4% comparable store sales increase (quarter) and $18.0 million in sales from new stores (acquisitions).
• Margin Pressure: Gross profit margin decreased from 43.1% to 40.9% (quarter) and 43.5% to 41.3% (six months). Management attributes this to a shift in sales mix toward lower-margin tire categories due to recent acquisitions (over 80% of the deterioration) and increased tire/oil costs.
• Operating Efficiency: Operating expenses as a percentage of sales improved significantly, dropping from 30.2% to 26.9% for the quarter, due to the leverage of fixed costs against higher sales volumes.
• Debt Reduction: Long-term debt decreased from $96.4 million (March 27, 2010) to $72.5 million (September 25, 2010). Weighted average debt outstanding decreased by approximately $14 million for the quarter.
• Acquisitions: The Company acquired seven retail tire and automotive repair stores in the first quarter of fiscal 2011 for approximately $7.1 million, adding $11.3 million in annual sales.

Guidance, Outlook, and Risks

• Outlook: Management expects gross margin decline to be most pronounced in the first and second quarters of fiscal 2011. Margins are expected to flatten in the third and fourth quarters, with operating profit expected to be approximately 100 basis points better than the prior year.
• Dividends: The Board declared a regular quarterly cash dividend of $0.09 per common share or common share equivalent, payable beginning in the first quarter of fiscal 2011.
• Liquidity: The Company maintains a $163.3 million committed Revolving Credit Facility (with an accordion feature to $200 million). Approximately $46.8 million was outstanding as of September 25, 2010. The Company is in compliance with all debt covenants.
• Risks: Key risks include dependence on primary markets, economic conditions affecting consumer spending, parts supply restraints, and integration risks of acquired businesses. The Company is currently under audit by certain state tax jurisdictions for fiscal years 2001 to 2009.
• Subsequent Event: In October 2010, the Company signed an agreement to acquire three retail tire stores in Virginia for approximately $3.2 million, expected to close October 31, 2010.

Investor Verification Checklist

• Acquisition Integration: Verify the actual performance of the seven stores acquired in Q1 FY2011 and the three pending Virginia stores against the projected $11.3 million and $5 million annual sales figures.
• Margin Recovery: Monitor Q3 and Q4 results to confirm management's expectation that gross margins will flatten and operating profit will improve by 100 basis points.
• Debt Covenants: Confirm continued compliance with interest and rent coverage ratios and net worth requirements under the Revolving Credit Facility.
• Tax Audits: Track the resolution of state tax audits for fiscal years 2001-2009, as unrecognized tax benefits of $5.9 million could impact future earnings if adjusted.
• Comparable Store Sales: Validate the sustainability of the 6.4% comparable store sales increase, noting the methodology change regarding selling days (now including Sundays and holidays).