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 ended June 27, 2009 (13 weeks)
Business Overview: Operator of automotive repair and tire retail stores. As of June 27, 2009, the company operated 740 company-operated stores, an increase from 713 in the prior year quarter, driven by the acquisition of 26 Autotire stores and the opening of 4 new locations.

Key Financial Metrics

Note: Total debt calculated as Current portion of long-term debt ($1,679) + Long-term debt ($95,992).

Material Changes vs. Prior Period

• Sales Growth: Sales increased 6.4% ($7.7 million) year-over-year. This was driven by a 6.2% increase in comparable store sales and $2.5 million in sales from new stores (including the Autotire acquisition). Comparable store sales growth was attributed to increased brake and tire sales, effective advertising, and price increases.
• Margin Expansion: Gross profit margin improved to 44.1% from 42.3%. Improvements were due to a shift in sales mix toward tires, better leverage of fixed distribution costs, increased vendor rebates, and price increases offsetting margin pressure.
• Operating Expenses: Total operating expenses increased to 30.8% of sales from 30.7%. SG&A expenses remained flat as a percentage of sales (30.6%) despite a $2.3 million increase in absolute dollars, aided by cost control and lower utility expenses.
• Acquisition Activity: The company acquired 26 Autotire stores for approximately $7.4 million in cash. This resulted in $4.4 million of goodwill and $2.6 million of intangible assets.
• Interest Expense: Net interest expense increased by approximately $0.4 million due to a 250 basis point increase in the weighted average interest rate, partially offset by a reduction in the weighted average debt outstanding.

Guidance, Outlook, and Risks

• Outlook: Management believes soft economic conditions and declining new car sales are driving consumers to repair existing vehicles, benefiting the company. They anticipate that dealership closings by Chrysler and General Motors will further drive business to their stores.
• Liquidity: The company maintains a $163.3 million committed Revolving Credit Facility (with an accordion feature up to $200 million). Approximately $62.3 million was outstanding as of June 27, 2009. The company is in compliance with all debt covenants.
• Dividends: The Board declared a quarterly cash dividend of $0.07 per common share for fiscal 2010, beginning with the first quarter.
• Risks and Contingencies:
  • Interest Rate Risk: Approximately 49% of long-term debt (excluding capital leases) is at fixed rates. The company uses three interest rate swaps ($30 million notional) to hedge floating rate exposure.
  • Legal Proceedings: A class-action lawsuit regarding overtime pay was settled in March 2009. All payments were made in April 2009. No other material legal proceedings are pending.
  • Tax Audits: The company is under audit by state tax jurisdictions for fiscal years 2001-2007. It is reasonably possible that unrecognized tax benefits may change in the next 12 months, though the impact cannot be estimated.

Investor Verification Checklist

• Acquisition Integration: Verify the performance of the 26 newly acquired Autotire stores and the finalization of purchase price accounting.
• Debt Covenants: Confirm continued compliance with interest coverage and net worth covenants under the Revolving Credit Facility.
• Comparable Store Sales: Monitor the sustainability of the 6.2% comparable store sales increase in the context of ongoing economic conditions.
• Real Estate Commitments: Track the completion of the $20 million agreement to purchase land and buildings for 30 leased stores (21 purchased as of June 27, 2009).
• Tax Position: Review updates on state tax audits for fiscal years 2001-2007 and potential adjustments to unrecognized tax benefits.