Monro, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, April 1–June 30, 2018 (13 weeks), compared with the 13 weeks ended June 24, 2017. Monro operates tire, automotive repair, commercial and wholesale businesses as one operating segment. Interim results may not indicate full-year performance.
Financial performance
| Metric | Quarter ended June 30, 2018 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $295.8 million | $278.5 million | +6.2% |
| Gross profit / margin | $117.2 million / 39.6% | $112.9 million / 40.5% | Margin down 0.9 percentage point |
| Operating income / margin | $33.1 million / 11.2% | $33.7 million / 12.1% | Income down 2.0% |
| Net income | $20.6 million | $17.6 million | +17.4% |
| Diluted EPS | $0.62 | $0.53 | +17.0% |
| Operating cash flow | $50.2 million | $41.4 million | +$8.7 million |
Net income benefited from a lower effective tax rate, 22.7% versus 37.2%, primarily reflecting the Tax Act’s reduction in the U.S. federal corporate rate. Diluted EPS included approximately $0.02 of non-recurring Monro.Forward costs.
Cash, debt and liquidity
- Cash and equivalents were $12.7 million at June 30, 2018, versus $1.9 million at March 31, 2018.
- Operating cash flow was $50.2 million; investing activities used $38.7 million, including $11.4 million of capital expenditures and $27.5 million for acquisitions. Financing activities used $0.8 million, including $6.7 million of dividends.
- Long-term debt was $158.0 million, with $20.1 million shown as current debt and lease obligations. Capital leases and financing obligations totaled $252.7 million. These are reported separately; the filing does not provide a single combined debt measure.
- The $600 million revolving credit facility had $158.0 million outstanding and $410.6 million of net availability. Monro reported compliance with all debt covenants. A 1% change in LIBOR was estimated to change annual interest expense by approximately $1.6 million based on period-end debt.
Material changes and management commentary
- Sales increased $17.3 million: new stores contributed $14.4 million, including $9.7 million from fiscal 2019 and fiscal 2018 acquisitions; comparable-store sales rose 1.9%. Closed stores reduced sales by $2.1 million.
- Comparable sales were strongest in brakes (+approximately 7%); tires and front end/shocks each rose approximately 2%. Alignment and maintenance each declined approximately 1%.
- Gross margin pressure reflected the larger contribution from lower-margin commercial and wholesale tire operations, higher material costs associated with initial brake-package pricing, and increased labor costs related to store staffing. Commercial and wholesale revenue was $32.5 million versus $27.0 million; management estimated these operations reduced consolidated gross margin by approximately 370 basis points, compared with 300 basis points a year earlier.
- Operating expenses rose $5.1 million, partly due to $1.6 million of Monro.Forward costs and investments, including $0.8 million of one-time costs, and expenses for additional stores. Management said comparable-store operating income margin, excluding one-time Monro.Forward costs, fell approximately 50 basis points.
- Monro had 1,164 company-operated stores and 98 franchised locations at quarter-end. It added 19 company-operated stores and closed five during the quarter.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said it believes cash flows and bank financing are sufficient for planned expansion over the next 12 months and intends to continue pursuing acquisitions.
- First-quarter acquisitions had aggregate consideration of $27.3 million and contributed $5.4 million of sales from acquisition dates through quarter-end. After quarter-end, Monro acquired nine stores and had agreements to acquire 12 more stores, expected to close in fiscal Q2 and be financed through its credit facility.
- Monro expects the new lease accounting standard to materially affect its balance sheet, principally through recognition of right-of-use assets and lease liabilities for operating leases. It noted that approximately half of store leases and all land leases were then off balance sheet.
- Tariffs on imported products, including tires, may raise costs and could pressure profitability or demand if prices increase. Other stated risks include competition, weather, vendor and supply constraints, leverage and interest-rate exposure, technology and data-security risks, business interruption, litigation, and acquisition integration.
- Lease-payment guarantees, primarily for franchisees, had a maximum potential exposure of $3.1 million; the recorded liability was $0.1 million. The filing reports ordinary-course legal claims that management did not believe would have a material adverse effect.
Important facts for investors to verify
- Whether comparable-store sales and brake-package pricing improve, and whether gross-margin pressure from commercial and wholesale mix persists.
- Acquisition performance, integration costs, purchase-price valuation adjustments, and the effect of additional credit-facility borrowing.
- Interest-rate sensitivity, capital-lease obligations, covenant capacity, and the board’s discretion over future dividends.
- The eventual balance-sheet and expense effects of lease-standard adoption and any material changes arising from tariff actions or Tax Act accounting.