Monro, Inc. (Monro Muffler Brake, Inc.) — Q1 FY2015 Form 10-Q
Business context and period: The filing covers the 13 weeks ended June 28, 2014, compared with the 13 weeks ended June 29, 2013. Monro operates tire and automotive repair stores. Interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Sales | $217.5 million | $206.2 million |
| Gross profit / margin | $90.0 million / 41.4% | $78.9 million / 38.3% |
| Operating income / margin | $29.4 million / 13.5% | $23.1 million / 11.2% |
| Net income | $16.9 million | $13.6 million |
| Diluted EPS | $0.52 | $0.42 |
| Net cash from operations | $34.1 million | $33.5 million |
| Capital expenditures | $9.0 million | $7.4 million |
Sales increased 5.5%; comparable-store sales increased 0.9%. Cost of sales fell to 58.6% of sales from 61.7%, while operating expenses rose to 27.9% from 27.1%. Net interest expense was $2.1 million, up about $0.3 million. The effective tax rate increased to 38.1% from 36.4%; management estimated this reduced quarterly EPS by about $0.01.
Cash, debt and liquidity
Cash and equivalents were $2.3 million at June 28, 2014, versus $1.2 million at March 29, 2014. Operating cash flow was $34.1 million; investing used $27.3 million, including $18.4 million for acquisitions and $9.0 million for capital expenditures. Financing used $5.7 million, including $4.2 million of dividends. Cash increased $1.1 million during the quarter.
Long-term debt, including the current portion, was $105.6 million at quarter-end. The company also reported $86 million of capital lease and financing obligations. Its $250 million revolving credit facility had $104.9 million outstanding, a $23.7 million letter of credit, and $121.4 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 $1.0 million based on quarter-end debt.
Material changes and operating commentary
- Net income rose 24.8% and diluted EPS rose 23.8% year over year; operating income increased 27.3%.
- Management attributed improved gross margin mainly to lower material costs as a share of sales, including a shift toward lower-cost direct-import tires with higher margins. Slightly higher labor costs partly offset the benefit.
- Comparable-store traffic rose about 2%, while average ticket declined slightly. Tire sales fell about 3% on a comparable basis as customers traded down, although tire units increased about 1%. Several repair categories benefited from harsh winter conditions.
- At June 28, Monro had 966 company-operated stores, up from 935 a year earlier. It added 19 and closed six during the quarter.
- Fiscal 2015 acquisitions included 19 Michigan stores and two New Hampshire stores. After quarter-end, Monro signed an agreement to acquire 35 Florida stores, expected to close in Q2 and be funded through the credit facility.
Outlook, risks and contingencies
No specific earnings or revenue guidance is provided. Management said it believed available operating cash flow and bank financing were sufficient for its currently planned expansion over the next 12 months. It planned continued store upgrades, systems investment, and acquisition activity. The board’s declared $0.13 quarterly dividend is discretionary and subject to financial condition, capital needs, and credit-facility and charter restrictions.
Management cited risks including weak consumer demand and deferred repairs, competition and pricing, supply constraints, capital needs and leverage, interest-rate changes, acquisition integration and potential goodwill impairment, litigation, regulation, and cybersecurity and customer-data risks. State tax audits for fiscal 2011 and 2012 could change recorded uncertain-tax-position balances, but the company said the effect could not be estimated. Unrecognized tax benefits were $6.1 million, with approximately $0.3 million of accrued interest and penalties. Routine legal claims were not expected to have a material adverse effect.
Acquisition purchase-price valuations remained subject to refinement, including estimates for warranties, intangible assets, real estate, and leases; resulting adjustments may or may not be material. Management stated disclosure controls were effective and reported no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether comparable-store sales and repair-category trends persisted, particularly the decline in comparable tire sales and consumer trade-down behavior.
- How the Florida store acquisition closes, is financed, and performs, and whether acquisition-related valuation adjustments affect reported results.
- Credit-facility availability, covenant compliance, lease obligations, and exposure to floating interest rates as expansion continues.
- Whether the higher gross margin is sustainable and whether operating-expense growth, taxes, and acquisition costs affect future earnings.
- Outcomes of tax audits and any changes in uncertain tax positions; future dividends remain subject to board discretion.