Monro, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months of fiscal 2023, ended September 24, 2022; comparable periods ended September 25, 2021. Monro operates automotive repair and tire-service stores. At quarter-end it had 1,297 company-operated stores in 32 states and 80 franchised locations.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Sales | $329.8 million, down 5.1% | $679.4 million, down 1.5% |
| Gross profit / margin | $116.7 million / 35.4% | $238.9 million / 35.2% |
| Operating income | $23.5 million, down 31.9% | $49.7 million, down 20.3% |
| Net income | $13.1 million | $25.6 million |
| Diluted EPS | $0.40 vs. $0.62 | $0.77 vs. $1.08 |
| Adjusted diluted EPS (non-GAAP) | $0.43 vs. $0.62 | $0.85 vs. $1.17 |
Quarterly comparable-store sales increased 1.3%; six-month comparable-store sales increased 0.8% overall, or 2.0% at retail locations. Quarterly sales fell mainly because wholesale tire operations were sold; excluding the closed-store impact, new-store sales and comparable-store sales contributed to results. Gross margin declined 220 basis points in the quarter and 200 basis points year to date.
Cash, debt and liquidity
- Six-month operating cash flow was $120.3 million, versus $102.3 million a year earlier. The filing attributes $48.2 million of cash-flow improvement to its supply-chain finance program.
- Investing activities provided $37.9 million, including $56.6 million of divestiture proceeds, partly offset by $19.6 million of capital expenditures. Financing activities used $156.4 million, including $71.2 million of share repurchases and $18.6 million of dividends.
- Cash was $9.8 million at quarter-end. Credit Facility borrowings were $130.0 million, with $440.4 million available; a further $29.6 million of letters of credit was outstanding. Monro reported compliance with all debt covenants.
- Balance-sheet finance lease and financing obligations were $360.5 million current and long-term combined; operating lease liabilities were $229.2 million combined. These lease obligations are in addition to reported long-term debt.
- Management said available funding sources should provide adequate liquidity for the 12 months following quarter-end and over the long term. Fiscal 2023 capital expenditures were expected to be $40–$50 million.
Changes, outlook and risks
- On June 17, 2022, Monro sold seven wholesale tire locations and internal tire distribution operations to American Tire Distributors (ATD). It received $62 million at closing, including $5 million held in escrow, and expects $40 million in quarterly earnout payments over about two years based on tire purchases through ATD. After the earnout period, company stores must source at least 90% of forecast requirements for specified tire categories from or through ATD, subject to stated supply exclusions.
- Lower gross margin reflected higher retail material costs, a higher tire sales mix, the decision not to pass all inflation-related cost increases to consumers, and higher technician labor costs. Management said it does not expect further significant incremental technician-headcount investment.
- Management cited elevated inflation, constrained labor availability, rising labor costs and interest rates, and the possibility of an economic slowdown or recession. These conditions could increase costs or weaken demand. It expected inflationary pressures on customers to continue through the remainder of fiscal 2023.
- No specific sales or earnings guidance was provided in the filing. Management noted the business is seasonal, so interim results may not indicate full-year performance.
- Quarter results included $1.3 million of executive-management restructuring costs related to the divestiture. The six-month effective tax rate was 33.6%, versus 25.6% a year earlier, reflecting discrete divestiture-related tax effects and changes in the mix of state income.
- The company faces ordinary-course legal proceedings; the filing does not quantify a likely loss. Other disclosed risks include vendor dependence, competitive pricing, labor retention, technology and cybersecurity disruptions, lease renewals, and the ability to realize benefits from the ATD transaction.
Investor verification priorities
- Track retail comparable sales, service-category demand and margins as inflation, pricing decisions and consumer activity evolve.
- Verify receipt and timing of the $40 million ATD earnout, the escrow release, and the longer-term sourcing requirements.
- Assess operating cash flow quality, including the contribution from supplier-finance arrangements and working-capital timing.
- Monitor debt, lease obligations, interest-rate exposure, capital spending, dividends and remaining share-repurchase authorization.
- Review subsequent disclosures for litigation developments, restructuring costs and divestiture-related tax impacts.