Monro, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended March 28, 2020 (52 weeks), including the fourth quarter. The company filed on June 12, 2020, after delaying its report because of COVID-19-related disruption. Monro operates automotive repair and tire businesses in one reportable segment; at year-end it had 1,283 company-operated stores, 98 franchised locations, eight wholesale locations and three retread facilities.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Sales | $1,256.5 million | $1,200.2 million |
| Comparable-store sales | Down 2.3% | Up 0.4% |
| Gross profit / margin | $476.7 million / 37.9% | $465.2 million / 38.8% |
| Operating income / margin | $101.7 million / 8.1% | $126.7 million / 10.6% |
| Net income | $58.0 million | $79.8 million |
| Diluted EPS | $1.71 | $2.37 |
| Operating cash flow | $121.3 million | $152.9 million |
| Capital expenditures | $55.9 million | $44.5 million |
Sales grew 4.7%, primarily from new stores and acquisitions, including $73.2 million of sales contribution from FY2020 and FY2019 acquisitions. Lower comparable-store sales partly offset this growth. Gross margin contracted by 0.9 percentage points, while SG&A rose to 29.8% of sales from 28.2%. Management cited weaker fixed-cost leverage, higher labor costs and wage inflation. Net interest expense was $28.2 million, versus $27.0 million.
Cash and equivalents were $345.5 million at year-end, compared with $6.2 million a year earlier, following a March drawdown of the revolving facility. Revolver borrowings were $566.4 million, leaving no facility availability at March 28; the $600 million facility also had a $33.6 million letter of credit outstanding. Finance lease and financing-obligation liabilities were $330.6 million, and operating lease liabilities were $201.1 million. The company reported $734.4 million of shareholders’ equity. Contractual debt, lease and other commitments totaled $1.268 billion on an undiscounted basis. Management said liquidity was sufficient for at least 12 months; as of June 5, 2020, cash on hand was $384.2 million.
Material changes and unusual items
- FY2020 net income fell 27.2% and diluted EPS fell 27.8% year over year. Adjusted diluted EPS, a non-GAAP measure, was $2.00 versus $2.40; it excludes specified impairment, Monro.Forward, acquisition, headquarters and litigation costs.
- Fourth-quarter comparable-store sales declined sharply as COVID-19 restrictions reduced traffic, compounded by mild winter weather in northern markets. The quarter recorded a $3.8 million net loss and $6.6 million in long-lived-asset impairment charges, including $4.3 million related to planned store closures.
- Operating cash flow declined $31.6 million. Investing outflows included $104.4 million for acquisitions and $55.9 million of capital expenditures. Financing cash flow included increased revolver borrowing.
- Adoption of the new lease accounting standard increased assets by $165.3 million and liabilities by $165.9 million at adoption; prior periods were not restated.
- The annual goodwill and intangible-asset tests found no impairment. The company recorded long-lived-asset impairment of $6.6 million, including the planned closure charges.
Outlook, management commentary and risks
Management reported steady sales improvement after an early-April low, but said the duration and financial effects of COVID-19 could not be reliably predicted. Weekly comparable-store sales declines improved from 52% for the week ended April 11 to 19% for the week ended June 6, 2020; management cautioned that the trend was not assured. No quantified full-year financial guidance was provided.
- For FY2021, Monro expected to close 36 underperforming stores and open approximately 10–20 greenfield stores. Acquisitions were paused and noncritical capital spending, including store rebranding and modernization, was suspended pending better visibility.
- Cost and operating responses included reduced store hours, staffing, advertising and non-store compensation; management was also discussing potential rent deferrals or abatements with landlords. COVID-related safety supplies and labor inefficiencies could add costs.
- On June 11, 2020, after the reporting date, the company amended its credit facility. The amendment requires at least $275 million of monthly liquidity during the specified relief period, relaxes and adjusts financial covenants, and increases the minimum borrowing spread to 225 basis points over LIBOR during that period. Acquisitions and dividends are permitted subject to limits and covenant compliance.
- Key risks include persistent demand and mileage weakness, economic conditions, vendor and import exposure (including tariffs), competitive pricing, leverage and covenant compliance, interest-rate changes, skilled-labor availability, store and acquisition integration, impairment risk, environmental and employment regulation, litigation, and cybersecurity or business interruption.
The company was in compliance with its debt covenants at March 28, 2020 and said it expected to remain compliant for at least 12 months. The auditor issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether sales and comparable-store traffic recover, and whether the improvement reported through June 6 continues.
- Available liquidity and covenant headroom under the amended credit facility, including minimum liquidity requirements, debt pricing and permitted dividend or acquisition spending.
- Whether weaker store performance leads to additional closures, impairment charges or lease-related costs beyond the 36 planned closures.
- How acquisition contributions, labor and occupancy costs, and store modernization affect margins and returns when suspended growth initiatives resume.
- The sustainability of the $0.22-per-share dividend declared in May 2020, subject to financing restrictions and board discretion.