Monro, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Quarter and nine months ended December 24, 2022; comparisons are to the periods ended December 25, 2021. Monro operates automotive repair and tire stores. At quarter-end it had 1,296 company-operated stores and 79 franchised locations. Unless stated otherwise, financial amounts below are in millions.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Sales | $335.2 | $341.8 | $1,014.5 | $1,031.3 |
| Gross profit / margin | $113.5 / 33.8% | $120.6 / 35.3% | $352.4 / 34.7% | $377.2 / 36.6% |
| Operating income | $23.8 | $27.4 | $73.6 | $89.8 |
| Net income | $13.0 | $16.3 | $38.6 | $53.0 |
| Diluted EPS | $0.41 | $0.48 | $1.17 | $1.56 |
Quarterly sales declined 1.9%; nine-month sales declined 1.6%. Comparable-store sales increased 5.6% for the quarter (4.4% adjusted for selling days) and 2.3% for the nine months (2.0% adjusted). The sales decline largely reflected the divestiture of wholesale tire operations. Management reported adjusted diluted EPS, a non-GAAP measure, of $0.43 for the quarter and $1.27 for the nine months.
Gross margin fell 150 basis points for the quarter and 190 basis points for the nine months. Management cited higher retail material costs, tire-mix changes and customers trading down, as well as technician labor investment and a decision not to pass all inflation-related material cost increases on to customers. Lower OSG&A partially offset the gross-profit decline.
Cash, debt and capital allocation
- Nine-month operating cash flow was $171.2, versus $127.2 a year earlier. Management said the voluntary supplier-finance program contributed $94.8 of cash-flow improvement; inventory was a $12.3 use of cash.
- Investing activities provided $35.6, including divestiture proceeds; financing activities used $201.7, including $96.9 for share repurchases, $27.5 in dividends and net debt repayments.
- Cash was $13.0 at December 24, 2022. Credit Facility debt was $130.0, with $440.4 available; a further $29.6 of letters of credit was outstanding. The company reported compliance with all debt covenants.
- The revolving facility was extended to November 10, 2027, and its borrowing rate now references SOFR. A 100-basis-point rate change was estimated to alter annual interest expense by approximately $1.3 at quarter-end debt levels.
- The board authorized repurchases of up to $150.0; 2.2 million shares had been repurchased for $96.9 at an average $44.00 per share. The quarterly common dividend declared was $0.28 per share.
Material developments, outlook and risks
- Monro sold its seven wholesale tire locations and internal tire distribution operations to American Tire Distributors (ATD) for stated total consideration of $102.0: $62.0 at closing, including $5.0 held in escrow, plus $40.0 tied to tire purchases and payable over about two years. The company received $4.3 of earnout payments in the quarter. The distribution agreement includes future purchase commitments for specified tire categories.
- The divestiture contributed to lower reported sales and generated a $2.4 pretax gain. Monro also incurred $1.3 of management restructuring costs. Discrete tax impacts related to the sale contributed to a higher nine-month effective tax rate of 31.7%, compared with 25.5% a year earlier.
- Management expects fiscal 2023 capital expenditures of $35–$45 and said current liquidity sources should be adequate for the 12 months following December 24, 2022. It also expected inflation to continue affecting customers through the rest of fiscal 2023; no specific sales or earnings guidance is provided in the filing.
- Risks discussed include persistent inflation, labor constraints and wage costs, rising interest rates, potential economic slowdown or recession and weaker customer demand, as well as vendor, acquisition, technology, data-security, lease and litigation risks.
- A California wage-and-hour class action and related PAGA matter remained in discovery; the company reported $0.5 of related expense for the quarter and nine months and said it intended to defend the matter. Management cautioned that adverse litigation outcomes could materially affect results or financial position.
Key facts for investors to verify
- Whether comparable-store sales growth and recent gains at smaller or underperforming stores persist, particularly as inflation and consumer demand affect service categories.
- Whether gross margins recover as material costs, product mix, pricing and technician labor costs evolve.
- The timing and collection of the ATD escrow and earnout payments, and the effect of the tire-supply agreement and purchase commitments on costs and operations.
- The sustainability of operating cash flow, including the contribution from supplier financing and extended payment terms.
- Future share repurchases, dividend payments, floating-rate borrowing costs, covenant compliance and the outcome of the California litigation.