Business Context and Reporting Period
Company: MONRO MUFFLER BRAKE, INC. (Monro)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Quarter and nine months ended December 26, 2009 (Fiscal Year 2010)
Business Overview: Monro operates a chain of retail tire and automotive repair stores. As of December 26, 2009, the company operated 780 company-owned stores and six franchised locations. The company utilizes a 52/53-week fiscal year ending on the last Saturday in March.
Key Financial Metrics
| Metric | Quarter Ended Dec 26, 2009 | Nine Months Ended Dec 26, 2009 |
|---|---|---|
| Sales | $152.7 million | $417.4 million |
| Gross Profit | $58.6 million (38.3% margin) | $173.8 million (41.6% margin) |
| Operating Income | $14.3 million (9.3% margin) | $48.8 million (11.7% margin) |
| Net Income | $7.9 million | $27.3 million |
| Diluted EPS | $0.38 | $1.33 |
| Cash and Equivalents | $4.9 million (as of Dec 26, 2009) | N/A |
| Net Cash from Operating Activities | N/A | $72.3 million |
| Total Debt (Current + Long-term) | $89.1 million | N/A |
| Shareholders' Equity | $225.2 million | N/A |
Material Changes vs. Prior Period
- Sales Growth: Sales increased 28.7% for the quarter and 16.3% for the nine months compared to the prior year. This was driven by a 7.2% comparable store sales increase and $29.0 million in sales from new acquisitions.
- Profitability: Net income rose 41.8% for the quarter and 29.8% for the nine months. Operating margins improved due to better leverage of fixed costs and cost control measures.
- Acquisitions: The company completed four significant acquisitions in the first nine months of fiscal 2010:
- Tire Warehouse: 41 stores in New England (acquired Oct 2009) for ~$34.0 million.
- Autotire: 26 stores in St. Louis (acquired June 2009) for ~$7.4 million.
- Midwest Tire: 4 stores in Indiana (acquired Sept 2009) for ~$2.0 million.
- Cheshire Tire: 1 store in New Hampshire (acquired Nov 2009) for ~$1.9 million.
- Interest Expense: Net interest expense decreased due to lower debt levels and a reduction in the weighted average interest rate by approximately 200 basis points.
- Tax Rate: The effective tax rate increased to 40.7% for the quarter (from 34.2% prior year) primarily due to adjustments for uncertain tax positions.
Guidance, Outlook, and Risks
- Outlook: Management attributes improved sales to consumers keeping vehicles longer due to soft economic conditions and the closure of dealership networks by Chrysler and General Motors. The company expects to continue expanding through acquisitions and store renovations.
- Liquidity: The company maintains a $163.3 million committed Revolving Credit Facility (with an accordion feature to $200 million). Approximately $69.3 million was outstanding as of December 26, 2009. Management believes current resources are sufficient for planned expansion.
- Dividends: The Board declared a quarterly cash dividend of $0.07 per share for fiscal 2010. Dividend payments are subject to debt covenant restrictions (limited to 25% of prior year's net income).
- Risks:
- Market Risk: Exposure to interest rate fluctuations on floating-rate debt, partially mitigated by $30 million in interest rate swaps maturing in July 2010.
- Integration Risk: Risks associated with integrating recently acquired businesses (Tire Warehouse, Autotire, etc.).
- Economic Sensitivity: Dependence on consumer spending and the automotive repair market.
- Legal Proceedings: A class-action lawsuit regarding overtime pay was settled in March 2009 for approximately $0.9 million; all payments were completed in April 2009. No other material litigation is pending.
Investor Verification Checklist
- Acquisition Accounting: Verify the final purchase price allocation for the Tire Warehouse, Midwest Tire, and Cheshire acquisitions, as the company noted these were not fully completed at the time of filing.
- Debt Covenants: Confirm continued compliance with the Revolving Credit Facility covenants, specifically interest coverage, rent coverage, and net worth requirements.
- Tax Positions: Monitor the resolution of state tax audits for fiscal years 2001-2007, which could impact the effective tax rate and unrecognized tax benefits ($5.2 million recorded).
- Comparable Store Sales: Validate the sustainability of the 7.2% comparable store sales growth in the context of ongoing economic conditions.
- Real Estate Purchases: Confirm the completion of the $20 million agreement to purchase 30 leased store properties, 27 of which were purchased by December 26, 2009.