Business context and reporting period
Monro, Inc. filed this Form 10-K for the fiscal year ended March 31, 2018 (53 weeks; prior year was 52 weeks). The company operates automotive undercar repair and tire businesses in the U.S.; at year-end it had 1,150 company-operated stores, 102 franchised locations, five wholesale locations, two retread facilities and two dealer-operated stores across 27 states. Brett T. Ponton became CEO in October 2017.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Sales | $1,127.8 million | $1,021.5 million |
| Gross profit / margin | $435.6 million / 38.6% | $396.9 million / 38.9% |
| Operating income / margin | $127.3 million / 11.3% | $116.4 million / 11.4% |
| Net income | $63.9 million | $61.5 million |
| Diluted EPS | $1.92 | $1.85 |
| Operating cash flow | $121.2 million | $129.9 million |
| Capital expenditures | $39.1 million | $34.6 million |
| Cash and equivalents at year-end | $1.9 million | $9.0 million |
- Sales increased 10.4%, principally from new stores and acquisitions; comparable-store sales rose 1.8% as reported, but were approximately flat after adjusting for selling days. Higher average ticket was offset by lower traffic.
- Gross margin declined 0.3 percentage point, principally from the acquired commercial and wholesale mix, which reduced consolidated gross margin by about 230 basis points, partly offset by lower material costs. Operating margin edged down 0.1 point.
- Interest expense rose to $24.3 million from $19.8 million. The company cited higher average debt and an approximately 90-basis-point increase in its weighted-average interest rate.
- Net cash used in investing was $58.5 million, including $39.1 million of capital expenditures and $23.4 million for acquisitions. Dividends paid were $24.0 million.
- At March 31, 2018, revolving-credit debt was $148.0 million and capital leases/financing obligations were $246.2 million. The $600 million revolving facility had $422.6 million of net availability; the company reported compliance with all debt covenants. Net working capital was $13.3 million.
Material changes, outlook and risks
- FY2018 added 49 company stores and closed 17; year-end company-store count increased by 32. Acquisitions contributed significantly to sales growth. The company plans approximately 20–40 new greenfield stores in FY2019 and expects to pursue acquisitions; it gave no specific earnings or revenue guidance.
- The Tax Act generated a $4.7 million discrete tax expense, reducing FY2018 diluted EPS by about $0.06. Management expected future earnings to benefit from the lower federal corporate tax rate, subject to remaining tax-accounting estimates and guidance.
- FY2018 included a $2.0 million labor-litigation settlement and $3.2 million of management-transition costs. The 53rd selling week contributed about $0.10 per diluted share, partly offsetting these items and the tax charge.
- Key stated risks include intense competition and pricing pressure, consumer spending and mileage/weather sensitivity, vendor concentration and foreign sourcing, skilled-technician availability, acquisition integration and store profitability, leverage and floating-rate exposure, environmental and employment regulation, litigation, and cybersecurity/data-security disruptions.
- The company settled a wage-and-overtime lawsuit for $1.95 million. It reported no material adverse expectation from other ordinary-course legal claims. Goodwill impairment testing identified no impairment for FY2018.
- Auditor PricewaterhouseCoopers LLP issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How much future comparable-store growth is driven by traffic versus average ticket, and whether traffic improves.
- Whether acquisition and commercial/wholesale mix continues to dilute gross margins, and whether new and acquired stores meet profitability targets.
- Debt, lease and financing-obligation burdens, covenant headroom, and sensitivity to interest rates; the filing estimates a 1% LIBOR change would move annual interest expense by about $1.5 million.
- The realized impact of the Tax Act and completion of purchase-price valuations for FY2018 acquisitions.
- Execution of the FY2019 store-opening and acquisition plans, alongside cash generation, capital spending and dividend commitments.