Monro, Inc. — Q1 Fiscal 2023 Form 10-Q
Business and period: Monro operates automotive undercar repair, tire replacement, and related service businesses. It had 1,303 company-operated stores in 32 states and 80 franchised locations at June 25, 2022. The quarter covered the three months ended June 25, 2022; comparisons are with the three months ended June 26, 2021. Results are unaudited, and the company notes that its business is seasonal.
Financial results
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $349.5 million | $341.8 million | +2.3% |
| Gross profit / margin | $122.2 million / 35.0% | $125.9 million / 36.8% | Profit down 3.0%; margin down 180 bps |
| Operating income | $26.3 million | $27.9 million | -6.0% |
| Net income | $12.5 million | $15.7 million | -20.4% |
| Diluted EPS | $0.37 | $0.46 | -19.6% |
| Adjusted diluted EPS (non-GAAP) | $0.42 | $0.55 | -23.6% |
| Operating cash flow | $77.2 million | $62.7 million | +$14.5 million |
Sales and margins: Comparable store sales rose 0.4%; retail-location comparable sales increased 2.8%, including a 15% increase at approximately 300 small or underperforming locations. New-store sales contributed 3.3 percentage points to sales growth, partly offset by closed-store sales of 1.3 percentage points. Gross margin pressure primarily reflected higher technician labor costs (200 bps) and distribution and occupancy costs (60 bps); lower material costs provided a 70-bp offset. OSG&A was $95.9 million, or 27.4% of sales, versus $98.0 million, or 28.7%.
Taxes and unusual items: The effective tax rate rose to 39.6% from 25.4%, primarily due to discrete tax impacts associated with the wholesale tire and distribution asset sale and related deferred-tax revaluation, plus share-based award impacts. The quarter included a $2.4 million pretax divestiture gain and $1.2 million of related closing and warehouse costs within OSG&A. Adjusted results exclude specified items; they are non-GAAP measures and should be considered alongside GAAP results.
Cash, debt, and liquidity
- Cash was $30.6 million at June 25, 2022, compared with $7.9 million at March 26, 2022. Operating cash flow was $77.2 million; investing activities provided $48.9 million, mainly from the asset sale; financing activities used $103.4 million.
- Operating cash flow benefited from working-capital timing and the supply-chain finance program; the company reported a $16.2 million cash-flow benefit from that program during the quarter.
- Long-term debt was $110.0 million, down from $176.5 million at March 26, 2022. The $600 million revolving credit facility had $460.4 million available; Monro reported compliance with its debt covenants. A $29.6 million letter of credit was outstanding.
- Current assets were $247.3 million and current liabilities were $369.8 million. Total liabilities were $1.046 billion; total assets were $1.816 billion.
- Cash dividends paid were $9.5 million ($0.28 per share); the company repurchased $17.2 million of stock, or 413,600 shares, at an average $41.60 per share. The repurchase authorization is up to $150 million, with no stated expiration.
- Lease commitments were substantial: $571.6 million of contractual finance and operating lease payments, including $97.2 million due within one year, as stated in MD&A. The filing also presents undiscounted lease commitments in its commitments table.
Material developments, outlook, and risks
- On June 17, 2022, Monro sold its wholesale tire operations (seven locations) and internal tire distribution operations to American Tire Distributors (ATD). It received $62 million at closing, including $5 million held in escrow; a further $40 million is payable quarterly over approximately two years based on tire purchases. The distribution agreement requires company stores, after the earnout period, to source at least 90% of forecast requirements for specified tire categories from or through ATD, subject to supply exceptions. Its initial term is five years after the earnout period, with automatic annual renewals.
- Management expects capital expenditures of $40 million to $50 million in fiscal 2023 and stated that available cash, operating cash flow, and credit-facility availability should provide adequate liquidity for the following 12 months and longer term. No specific sales or earnings guidance was provided in the supplied filing text.
- Management said broad inflation, including higher fuel prices and reduced miles driven, contributed to weaker demand and expected inflation to continue affecting customers through the remainder of fiscal 2023. It did not expect further significant incremental investment in technician headcount.
- Risks cited include consumer demand and economic conditions, seasonality and weather, labor availability and costs, competition and pricing, vendor and import dependence, interest rates and debt service, litigation, acquisitions, store growth and lease renewals, data and systems security, and the ability to realize benefits from the ATD transaction. Legal proceedings are described as routine, but unfavorable outcomes could materially affect results.
Key facts for investors to verify
- Whether sales and comparable-store trends improve despite inflation and lower consumer driving activity, and whether the strong results at underperforming stores are sustainable.
- Whether gross-margin pressure from technician labor and fixed distribution and occupancy costs moderates, and how material-cost and service-mix trends develop.
- The timing and realization of the ATD escrow and earnout payments, and the longer-term economics and sourcing obligations of the distribution agreement.
- The durability of operating cash flow given its reliance on working-capital timing and supply-chain finance, alongside planned capital spending, dividends, repurchases, debt, and lease obligations.
- The impact of discrete divestiture-related tax items on reported earnings and the distinction between GAAP and adjusted results.