Monro, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended March 31, 2012, a 53-week year. The filing’s quarterly data includes the quarter ended March 2012. The company operated 803 stores, plus three franchised and 14 dealer-operated locations, providing automotive undercar repair, maintenance and tire services.
Financial performance and position
| Metric | FY2012 | FY2011 |
|---|---|---|
| Sales | $686.6 million | $636.7 million |
| Comparable-store sales | Up 2.0% reported; flat adjusted for selling days | Up 4.2% |
| Gross profit / margin | $276.4 million / 40.3% | $257.5 million / 40.4% |
| Operating income / margin | $91.4 million / 13.3% | $78.4 million / 12.3% |
| Net income | $54.6 million | $45.8 million |
| Diluted earnings per share | $1.69 | $1.44 |
| Cash from operations | $82.6 million | $65.5 million |
| Capital expenditures | $28.6 million | $17.5 million |
Sales rose 7.8%, supported by acquisitions and store additions; the extra fiscal week contributed to reported growth. Excluding that week, comparable-store sales were flat. Tire and oil cost increases pressured gross margin, while cost controls, labor efficiency and leverage of fixed costs helped operating margins. Operating expenses included a $1.7 million gain on sale of seven stores and $1.9 million of acquisition-related costs, including $1.3 million for unsuccessful Midas acquisition diligence.
At year-end, cash was $3.3 million, working capital was $24.5 million, total assets were $510.1 million and shareholders’ equity was $327.5 million. Debt, including capital leases, totaled $55.1 million: $5.0 million drawn on the revolving facility, $49.4 million in capital leases and $0.7 million mortgage debt. The company had a $175 million revolving facility expiring June 2016, with $18.0 million of letters of credit outstanding, and reported compliance with all covenants. Operating lease commitments were $98.0 million; capital lease commitments were $49.4 million.
Material changes and business developments
- Net income increased 19.1% and diluted EPS increased 17.4% year over year; operating margin improved by 1.0 percentage point.
- Gross margin edged down 0.1 percentage point, reflecting higher material costs and limited ability to fully pass through oil and tire cost increases.
- The company acquired 32 stores during FY2012, spent $39.2 million on acquisitions and ended the year with 803 company-operated stores. It sold seven Long Island stores for $2.0 million.
- Sales mix shifted modestly toward tires: tires represented 39% of sales versus 38% in FY2011. Management cited weaker tire-unit demand, consumer price resistance and milder winter weather; brake and exhaust comparable sales increased.
- The Rochester warehouse expansion was substantially completed, increasing space from 80,000 to 135,000 square feet.
Outlook, risks and contingencies
- Management planned approximately six new stores in FY2013 and expected to continue pursuing acquisitions. Subsequent to year-end, the company acquired 20 Kramer retail stores and agreed to acquire 18 Colony Tire stores; the combined purchase price was expected to be approximately $50 million, financed through the existing bank facility.
- The board declared a quarterly dividend of $0.10 per share in May 2012. Future dividends remain discretionary and subject to the credit agreement limit of 50% of preceding-year net income.
- Key risks include economic weakness and customers deferring repairs, competition and pricing pressure, seasonality, supplier concentration and import disruptions, skilled-labor availability, acquisition integration and store profitability, environmental and other regulation, litigation, information-system and data-security disruptions, and interest-rate and covenant risks.
- The company reported $5.5 million in unrecognized tax benefits and ongoing state tax audits; the possible effect of audit outcomes was not estimable. Management did not expect current litigation, individually or in aggregate, to materially affect financial condition or results.
- No material, extraordinary, unusual or infrequently occurring items were reported in the fourth quarter. The annual audit reported fairly presented financial statements and effective internal control over financial reporting.
Important facts for investors to verify
- How comparable-store sales and margins trend after adjusting for the 53rd week, and whether tire demand and pricing recover.
- Acquisition returns and integration progress, including the post-year-end Kramer and Colony transactions and the use of revolving-facility capacity.
- Cash generation relative to acquisition spending, capital expenditures, dividends and lease commitments.
- Debt-covenant headroom, the composition and long-term cost of capital leases, and sensitivity to interest rates.
- Potential outcomes of state tax audits and whether litigation, self-insurance claims or pension assumptions change materially.