Monro, Inc. — Form 10-Q Summary
Business context and period. Monro operates company-owned and franchised tire and automotive service locations. This filing covers the 13-week third quarter and 39 weeks ended December 24, 2016, in fiscal 2017; comparisons are to the periods ended December 26, 2015. The interim statements are unaudited.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Sales | $288.3 million, up 20.6% | $769.5 million, up 7.7% |
| Gross profit / margin | $105.6 million / 36.6%; prior-year margin 39.1% | $303.7 million / 39.5%; prior-year margin 41.1% |
| Operating income / margin | $33.1 million / 11.5%; up 25.1% | $96.3 million / 12.5%; up 2.3% |
| Net income | $17.6 million, up 15.3% | $51.9 million, down 2.0% |
| Diluted EPS | $0.53, up 15.2% | $1.56, down 1.9% |
- Quarterly comparable-store sales increased 2.3%, or 1.1% adjusted for selling days. Nine-month comparable-store sales declined 3.1%, or 3.5% adjusted for selling days.
- Quarterly gross margin pressure reflected acquired businesses, including tire wholesale operations, which have higher material costs than retail. Comparable-store gross margin was flat at 41.2% for both the quarter and nine-month period.
- Operating expenses were 25.2% of sales in the quarter and 26.9% year to date, versus 28.0% and 27.9%, respectively, in the prior-year periods. Management cited cost control and lower due-diligence costs, partially offset by expenses from new stores.
- Net interest expense rose to $5.3 million for the quarter and $14.2 million year to date, amid higher average debt and interest rates. Nine-month effective tax rate was 37.1%, versus 36.7%.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $101.8 million, compared with $81.7 million. Capital expenditures were $28.1 million; cash spent on acquisitions, net of acquired cash, was $133.7 million. Cash declined $1.5 million to $6.5 million.
- At December 24, 2016, total assets were $1.163 billion and shareholders’ equity was $574.0 million. Current assets were $196.0 million and current liabilities $182.1 million.
- Long-term debt was $184.6 million, compared with $103.3 million at March 26, 2016; current debt and lease obligations were $14.2 million. Capital leases and financing obligations totaled $209.9 million.
- The $600 million revolving credit facility had $184.5 million outstanding, $26.5 million of letters of credit and reported net availability of $389 million. Monro said it was in compliance with all debt covenants.
- All debt was floating-rate at period end. Management estimated that a 1% change in LIBOR would change annual interest expense by approximately $1.8 million based on the period-end debt position.
Changes, outlook and risks
- Fiscal 2017 acquisitions totaled $133.1 million in purchase consideration and generated $65.0 million of acquired-entity sales through December 24. Preliminary purchase accounting included $94.0 million of goodwill. Management attributed much of reported sales growth to acquisitions: $43.8 million of the quarter’s increase and $77.1 million of the nine-month increase came from fiscal 2016 and 2017 acquisitions.
- At quarter end Monro had 1,098 company-operated stores and 132 franchised locations. Management said stronger quarterly comparable tire sales were likely related to harsher winter weather, while consumers continued to defer repairs in other service categories.
- After quarter end, Monro signed agreements to acquire 19 additional stores, expected to close in fiscal Q4 and be financed through the existing credit facility. It plans to continue pursuing acquisitions and said resources should be sufficient for planned expansion over the next 12 months; no quantified earnings or sales guidance was provided.
- The company revised certain fiscal 2017 national-account tire-delivery transactions from gross to net presentation, reducing both sales and cost of sales by $3.1 million for the quarter and $7.4 million for nine months, with no gross-profit impact. The revisions were not material to prior-period statements.
- Risks identified include consumer demand, competition and pricing, weather and seasonality, vendor and parts availability, leverage and interest-rate exposure, acquisition integration and goodwill impairment, automotive technology changes, litigation, and cybersecurity and personal-data risks. Monro reported no legal proceedings it believed would materially affect its financial condition or results.
- The board’s stated fiscal 2017 quarterly dividend was $0.17 per common share or equivalent; future dividends remain subject to board discretion and credit-facility restrictions. The filing also notes $8.5 million of maximum potential payments under franchisee-related lease guarantees and a $0.7 million recorded liability for anticipated defaults.
Investor verification points
- Assess whether acquisition-driven sales growth and the improvement in quarterly comparable sales can be sustained, given the nine-month comparable-sales decline and weather-related tire demand.
- Track gross-margin effects from acquired wholesale and retail businesses, and verify that integration and cost synergies offset their lower-margin mix.
- Review debt, lease obligations, facility availability, covenant headroom and sensitivity to floating interest rates as Monro continues acquisitions and store investment.
- Monitor final purchase-price allocations and goodwill/intangible valuations; the filing says acquisition valuations remained preliminary and could be adjusted.
- Confirm future dividend declarations and the impact of the revenue-presentation revisions when comparing reported sales growth across periods.