Business context and reporting period
Monro, Inc. operates tire and automotive repair stores, with retail, commercial and wholesale operations reported as one segment. This unaudited Form 10-Q covers the 13 weeks ended December 23, 2017 (fiscal Q3 2018) and the 39 weeks ended that date; comparative periods ended December 24, 2016. Fiscal 2018 is a 53-week year ending March 31, 2018. Interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Quarter | Nine months |
|---|---|---|
| Sales | $285.7 million, down 0.9% | $842.2 million, up 9.5% |
| Comparable-store sales | Down 3.1% | Down 0.7% |
| Gross profit / margin | $107.0 million / 37.4%; prior year 36.6% | $327.8 million / 38.9%; prior year 39.5% |
| Operating income / margin | $29.3 million / 10.3%; prior year $33.1 million / 11.5% | $96.9 million / 11.5%; prior year $96.3 million / 12.5% |
| Net income | $11.6 million, down 34.0% | $46.5 million, down 10.4% |
| Diluted EPS | $0.35; prior year $0.53 | $1.39; prior year $1.56 |
| Net interest expense | $6.1 million; prior year $5.3 million | $18.0 million; prior year $14.2 million |
Quarterly gross margin improved mainly from lower material costs and sales mix, while comparable sales were pressured by lower customer traffic despite higher average ticket. Nine-month gross margin declined primarily because acquisitions added commercial and wholesale tire sales with lower margins. SG&A was $77.7 million for the quarter (27.2% of sales, versus 25.2%) and $230.9 million year to date (27.4%, versus 26.9%). Management attributed the increases to store growth and one-time litigation and management-transition costs. Excluding those costs, management reported quarterly operating income of $32.0 million and adjusted diluted EPS of $0.49, down 7.5%; nine-month adjusted diluted EPS was $1.57 versus $1.56.
For the nine months, operating cash flow was $97.1 million, compared with $101.8 million. Capital expenditures were $29.7 million; acquisitions, net of cash acquired, used $16.4 million. Cash declined $1.1 million from fiscal-year-end to $7.9 million. At December 23, total assets were $1.213 billion and total liabilities $598.8 million. Long-term debt was $154.6 million; capital leases and financing obligations totaled $244.8 million, including current obligations.
The $600 million revolving credit facility had $154.5 million outstanding, $29.4 million in letters of credit, and $416.1 million net availability. Monro reported compliance with all debt covenants. The company paid $18.0 million of dividends during the nine months, including quarterly dividends of $0.18 per common share or equivalent.
Material changes, outlook and risks
- Quarter sales decreased mainly because comparable-store sales fell 3.1%; new-store sales partly offset the decline. Nine-month sales growth reflected $82.4 million from new stores, including $66.4 million from acquisitions.
- Quarter operating expenses included approximately $2.0 million for a litigation settlement and $0.7 million for management transition; nine-month costs were approximately $2.0 million and $2.2 million, respectively. The company settled a wage-and-overtime lawsuit for $1.95 million in December 2017.
- The Tax Cuts and Jobs Act prompted a provisional $5.3 million reduction in deferred tax assets and related tax expense. Management said the Act reduced quarterly diluted EPS by approximately $0.10; it expects future earnings to benefit from the lower federal corporate tax rate. Estimates remain subject to refinement and could change materially.
- Management stated it believes available operating cash flow and bank financing are sufficient for planned expansion over the next 12 months and intends to continue seeking acquisitions. A seven-store acquisition was expected to close in fiscal Q4 and be financed through the credit facility; three Pennsylvania stores were acquired on January 14, 2018, also using the facility.
- Key disclosed risks include comparable demand and competition, seasonality and weather, costs and execution of store expansion, leverage and floating-rate exposure, vendor and parts availability, technology and data security, litigation, acquisition integration and goodwill impairment, and uncertainty in tax-law estimates. A 1% LIBOR change was estimated to affect annual interest expense by approximately $1.5 million at the reported debt position.
- New lease accounting is expected to materially increase balance-sheet assets and liabilities: approximately half of store leases and all land leases were then off balance sheet. The company had not yet determined the full effects of adoption.
- Monro guaranteed certain franchise-related lease payments with a maximum potential exposure of $5.4 million through April 2020; a $0.2 million liability was recorded at December 23, 2017. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-store sales, particularly traffic, recover and how sales mix affects gross margins.
- The extent to which reported results and adjusted EPS reconcile, and whether litigation and transition costs recur.
- The final tax-reform accounting, including deferred-tax remeasurement and the timing and size of expected tax benefits.
- Acquisition integration, store productivity, goodwill valuations and the effect of lower-margin commercial and wholesale operations.
- Debt, lease obligations, interest-rate sensitivity, covenant capacity, and the eventual balance-sheet impact of lease-standard adoption.
- Whether planned acquisitions, capital spending and dividends remain supportable by cash generation and facility availability.