Monro(MNRO) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, income statements, equity changes, and cash flows, along with detailed notes on financial performance and position Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' equity at specific points in time Consolidated Balance Sheet Highlights (Millions USD) | Metric | September 23, 2023 | March 25, 2023 | Change | | :-------------------------------- | :------------------- | :------------- | :----- | | Cash and equivalents | $9.1M | $4.9M | +$4.2M | | Total current assets | $247.9M | $258.5M | -$10.6M | | Total assets | $1,726.8M | $1,776.9M | -$50.1M | | Total current liabilities | $472.4M | $449.2M | +$23.2M | | Long-term debt | $55.0M | $105.0M | -$50.0M | | Total liabilities | $1,026.6M | $1,082.0M | -$55.3M | | Total shareholders' equity | $700.1M | $694.9M | +$5.2M | Consolidated Statements of Income and Comprehensive Income This section details the company's financial performance over specific periods, presenting revenues, expenses, and net income Consolidated Statements of Income Highlights (Millions USD, except per share data) | Metric | Three Months Ended Sep 23, 2023 | Three Months Ended Sep 24, 2022 | Six Months Ended Sep 23, 2023 | Six Months Ended Sep 24, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Sales | $322.1M | $329.8M | $649.1M | $679.4M | | Gross profit | $115.0M | $116.7M | $229.4M | $238.9M | | Operating income | $22.4M | $23.5M | $39.7M | $49.7M | | Net income | $12.9M | $13.1M | $21.7M | $25.6M | | Basic EPS | $0.40 | $0.40 | $0.68 | $0.77 | | Diluted EPS | $0.40 | $0.40 | $0.68 | $0.77 | Consolidated Statements of Changes in Shareholders' Equity This section outlines the changes in the company's shareholders' equity over a period, reflecting net income, dividends, and stock-based compensation Changes in Shareholders' Equity (Millions USD) | Metric | Balance at March 25, 2023 | Net Income (6 months) | Dividends Declared (6 months) | Stock-based Compensation (6 months) | Balance at September 23, 2023 | | :-------------------------- | :------------------------ | :-------------------- | :---------------------------- | :---------------------------------- | :---------------------------- | | Total Shareholders' Equity | $694.9M | $21.7M | $(18.1M) | $1.9M | $700.1M | - Common dividends declared for the six months ended September 23, 2023, totaled $17.6 million, with $0.56 per common share[15] Consolidated Statements of Cash Flows This section details the cash inflows and outflows from operating, investing, and financing activities, illustrating changes in the company's cash position Summary of Cash Flows (Millions USD) for Six Months Ended | Activity | September 23, 2023 | September 24, 2022 | | :-------------------------------- | :------------------- | :------------------- | | Cash provided by operating activities | $98.3M | $120.3M | | Cash (used for) provided by investing activities | $(6.7M) | $37.9M | | Cash used for financing activities | $(87.5M) | $(156.4M) | | Increase in cash and equivalents | $4.2M | $1.8M | | Cash and equivalents at end of period | $9.1M | $9.8M | Notes to Consolidated Financial Statements This section provides detailed explanations and additional information supporting the consolidated financial statements, clarifying accounting policies and significant transactions Note 1 Description of Business and Basis of Presentation This note describes the company's core business operations, fiscal year definition, and the basis for presenting its financial statements - Monro, Inc. operates 1,298 company-operated retail stores and 77 franchised locations in 32 states, focusing on automotive undercar repair, tire replacement, and related services[21][23] - The company's fiscal year is 52/53 weeks, ending on the last Saturday in March; fiscal year 2024 is a 53-week year[26] - Assets related to the planned sale of the corporate headquarters were classified as held for sale as of September 23, 2023[34] Note 2 Acquisitions and Divestitures This note details the company's recent strategic transactions, including retail store acquisitions and the divestiture of wholesale tire operations - Acquired six retail tire and automotive repair stores in 2023 to expand market presence[36] - Completed the divestiture of wholesale tire operations in June 2022 for a total consideration of $102 million, with $7.3 million of the $40 million earnout received during the first six months of fiscal 2024[38] - The divestiture allows the company to focus resources on its core retail business operations[38] Note 3 Earnings per Common Share This note provides a breakdown of net income available to common shareholders and the calculation of basic and diluted earnings per common share Earnings per Common Share (Millions USD, except per share data) | Metric | Three Months Ended Sep 23, 2023 | Three Months Ended Sep 24, 2022 | Six Months Ended Sep 23, 2023 | Six Months Ended Sep 24, 2022 | | :----------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Net income | $12.9M | $13.1M | $21.7M | $25.6M | | Less: Preferred stock dividends | $(0.3M) | $(0.1M) | $(0.5M) | $(0.3M) | | Income available to common shareholders | $12.5M | $13.0M | $21.2M | $25.3M | | Basic earnings per common share | $0.40 | $0.40 | $0.68 | $0.77 | | Diluted earnings per common share | $0.40 | $0.40 | $0.68 | $0.77 | Note 4 Income Taxes This note explains the company's effective income tax rates and the factors influencing their fluctuations between periods Effective Income Tax Rate | Period | September 23, 2023 | September 24, 2022 | | :------------------- | :------------------- | :------------------- | | Three Months Ended | 26.8% | 26.6% | | Six Months Ended | 27.1% | 33.6% | - The effective income tax rate for the six months ended September 24, 2022, was higher by 6.9% due to discrete tax impacts from the divestiture of wholesale tire operations and revaluation of deferred tax balances[43] Note 5 Fair Value This note discusses the fair value measurements of the company's financial instruments, particularly long-term debt Long-term Debt Fair Value (Millions USD) | Date | Carrying Amount | Fair Value | | :----------------- | :-------------- | :--------- | | September 23, 2023 | $55.0M | $55.0M | | March 25, 2023 | $105.0M | $105.0M | - The fair value of long-term debt approximates its carrying amount due to its variable interest rate nature[44] Note 6 Cash Dividend This note details the cash dividends paid and the factors influencing future dividend declarations - Paid $17.9 million in dividends during the six months ended September 23, 2023[45] - Future dividends are at the discretion of the Board of Directors and depend on financial condition, results of operations, capital requirements, and compliance with credit facility covenants[45] Note 7 Revenues This note provides a breakdown of the company's revenue streams by category and details deferred revenue balances - Automotive undercar repair, tire replacement sales, and tire-related services constitute the vast majority of revenues[47] Revenues by Category (Millions USD) for Six Months Ended | Category | September 23, 2023 | September 24, 2022 | | :--------------- | :------------------- | :------------------- | | Tires | $306.0M | $331.0M | | Maintenance | $183.1M | $180.9M | | Brakes | $93.8M | $96.2M | | Steering | $54.4M | $57.6M | | Exhaust | $10.4M | $12.2M | | Other | $1.4M | $1.5M | | Total | $649.1M | $679.4M | Deferred Revenue (Millions USD) | Date | Balance | | :----------------- | :-------- | | September 23, 2023 | $22.2M | | March 25, 2023 | $22.4M | Note 8 Long-term Debt This note details the company's revolving Credit Facility, outstanding balances, and compliance with debt covenants - The company has a $600 million revolving Credit Facility, extended to November 10, 2027, with interest based on SOFR + 0.10%[52][57] - As of September 23, 2023, $55.0 million was outstanding under the Credit Facility, with $514.9 million available[59] - The company was in compliance with all debt covenants as of September 23, 2023[59] Note 9 Commitments and Contingencies This note outlines the company's contractual obligations, including debt, lease commitments, and potential impacts from legal proceedings Commitments Due by Period (Millions USD) | Commitment Type | Total | Within 1 Year | 2 to 3 Years | 4 to 5 Years | After 5 Years | | :------------------------------------ | :-------- | :------------ | :----------- | :----------- | :------------ | | Principal payments on long-term debt | $55.0M | $0 | $0 | $55.0M | $0 | | Finance lease commitments/obligations | $379.1M | $52.2M | $95.2M | $83.2M | $148.6M | | Operating lease commitments | $257.0M | $45.6M | $80.0M | $58.7M | $72.7M | | Total | $691.1M | $97.8M | $175.2M | $197.0M | $221.2M | - The company is a party to various legal proceedings, and unfavorable rulings could have a material adverse impact on its financial position and results of operations[61] Note 10 Supplier Finance Program This note describes the company's voluntary supply chain financing program and the outstanding obligations eligible for advance payment - The company facilitates a voluntary supply chain financing program, allowing suppliers to sell receivables to a financial institution, which is classified as a trade payable program[62][64] Outstanding Supplier Obligations Eligible for Advance Payment (Millions USD) | Date | Amount | | :----------------- | :-------- | | September 23, 2023 | $187.9M | | March 25, 2023 | $167.3M | | September 24, 2022 | $86.9M | Note 11 Share Repurchase This note summarizes the company's share repurchase activities, including the number of shares and total value repurchased Share Repurchase Activity (Millions USD, except per share data) | Period | Number of Shares Purchased | Average Price Paid Per Share | Total Repurchased | | :-------------------------------- | :------------------------- | :--------------------------- | :---------------- | | Six Months Ended Sep 23, 2023 | — | $— | $— | | Six Months Ended Sep 24, 2022 | 1,617.4 | $44.00 | $71.2M | Note 12 Equity Capital Structure Reclassification This note details the approved amendments to reclassify the equity capital structure, including the conversion of preferred stock and declassification of the Board of Directors - Shareholders approved amendments to reclassify the equity capital structure, eliminating Class C Convertible Preferred Stock through mandatory conversion by August 15, 2026[69] - The conversion rate for Class C Preferred Stock was adjusted from 23.389 to 61.275 common shares per preferred share[69] - The Board of Directors will be declassified, with all directors elected for one-year terms starting from the 2025 annual meeting[70] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, highlighting recent developments, economic impacts, and operational results Recent Developments This section highlights key recent events impacting the company, including the planned sale of its corporate headquarters and equity reclassification - Announced the planned sale and relocation of its corporate headquarters, incurring related costs during Q2[73] - Shareholders approved amendments to reclassify the equity capital structure, including mandatory conversion of Class C Preferred Stock at an adjusted rate and declassification of the Board of Directors[74] Economic Conditions This section discusses the prevailing macroeconomic environment, including inflation, labor availability, and interest rates, and their potential impact on the company - The U.S. economy is experiencing higher inflation, constrained labor availability, increasing labor costs, and rising interest rates[75] - These conditions may lead to an economic slowdown or recession, potentially increasing costs and/or impacting revenues[75] Financial Summary This section provides a concise overview of the company's key financial performance metrics for the quarter, including sales, income, and EPS Q2 2024 Financial Highlights | Metric | Value | Change YoY | | :-------------------- | :------ | :--------- | | Diluted EPS | $0.40 | 0.0% | | Adjusted Diluted EPS | $0.41 | (4.7)% | | Sales | $322.1M | (2.3)% | | Operating Income | $22.4M | (4.8)% | | Net Income | $12.9M | (1.9)% | - Sales decreased due to lower overall comparable store sales, primarily from reduced store traffic[76] - Adjusted diluted EPS, a non-GAAP measure, excludes non-recurring items for better period-to-period comparability[77][98] Analysis of Results of Operations This section provides a detailed analysis of the company's sales, cost of sales, gross profit, and operating expenses, explaining period-over-period changes Sales This section analyzes the company's sales performance, including total sales and the primary drivers of change such as comparable store sales Sales Performance (Millions USD) | Period | Sales | % Change YoY | | :-------------------------------- | :---------------- | :----------- | | Three Months Ended Sep 23, 2023 | $322.1M | (2.3)% | | Six Months Ended Sep 23, 2023 | $649.1M | (4.5)% | Primary Drivers of Sales Change (%) | Driver | Three Months Ended Sep 23, 2023 | Six Months Ended Sep 23, 2023 | | :-------------------- | :------------------------------ | :---------------------------- | | Comparable store sales | (2.3)% | (0.9)% | | Closed store sales | (0.4)% | (4.0)% | | New store sales | 0.4% | 0.4% | - Broad-based inflationary pressures led to lower demand in tires and higher-margin service categories[85] Cost of Sales and Gross Profit This section examines the company's cost of sales and gross profit, detailing the factors influencing gross profit margins Gross Profit Performance (Millions USD) | Period | Gross Profit | Percentage of Sales | % Change YoY | | :-------------------------------- | :----------- | :------------------ | :----------- | | Three Months Ended Sep 23, 2023 | $115.0M | 35.7% | (1.5)% | | Six Months Ended Sep 23, 2023 | $229.4M | 35.3% | (4.0)% | Gross Profit as a Percentage of Sales Change (bps) | Driver | Three Months Ended Sep 23, 2023 | Six Months Ended Sep 23, 2023 | | :------------------------------------ | :------------------------------ | :---------------------------- | | Retail material costs | 120 bps | (10) bps | | Technician labor costs | (30) bps | (50) bps | | Retail distribution and occupancy costs | (60) bps | (20) bps | | Impact from the sale of wholesale operations | - bps | 90 bps | OSG&A Expenses This section analyzes the company's operating, selling, general, and administrative expenses, highlighting the drivers of changes OSG&A Expenses (Millions USD) | Period | OSG&A Expenses | Percentage of Sales | % Change YoY | | :-------------------------------- | :------------- | :------------------ | :----------- | | Three Months Ended Sep 23, 2023 | $92.6M | 28.8% | (0.7)% | | Six Months Ended Sep 23, 2023 | $189.7M | 29.2% | 0.2% | - The decrease in OSG&A expenses for the three months was partially due to lower management restructuring costs and expenses from closed stores, offset by increases from shareholder matters, back-office optimization, and corporate headquarters relocation[92][93] Other Performance Factors This section reviews additional factors impacting financial performance, including net interest expense and provision for income taxes Net Interest Expense This section analyzes the company's net interest expense, considering changes in debt outstanding and interest rates Net Interest Expense (Millions USD) | Period | Net Interest Expense | % of Sales | | :-------------------------------- | :------------------- | :--------- | | Three Months Ended Sep 23, 2023 | $4.8M | 1.5% | | Six Months Ended Sep 23, 2023 | $10.0M | 1.5% | - Net interest expense decreased due to a reduction in weighted average debt outstanding (approx. $122M for 3 months, $130M for 6 months), despite an increase in weighted average interest rates (approx. 80-90 bps)[94][95] Provision for Income Taxes This section details the company's effective income tax rates and the specific factors influencing their period-over-period changes Effective Income Tax Rate | Period | September 23, 2023 | September 24, 2022 | | :------------------- | :------------------- | :------------------- | | Three Months Ended | 26.8% | 26.6% | | Six Months Ended | 27.1% | 33.6% | - The six-month effective tax rate for the prior year was 6.9% higher due to discrete tax impacts from the wholesale tire operations divestiture and deferred tax revaluation[97] Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures, such as adjusted net income and adjusted diluted EPS, used for comparability - Adjusted net income and adjusted diluted EPS are non-GAAP measures used to assess comparability by excluding non-recurring items such as shareholder matters, back-office optimization, corporate headquarters relocation, and store closing costs[98] Adjusted Net Income (Millions USD) | Period | September 23, 2023 | September 24, 2022 | | :-------------------------------- | :------------------- | :------------------- | | Three Months Ended | $13.3M | $14.0M | | Six Months Ended | $23.2M | $28.2M | Adjusted Diluted EPS | Period | September 23, 2023 | September 24, 2022 | | :-------------------------------- | :------------------- | :------------------- | | Three Months Ended | $0.41 | $0.43 | | Six Months Ended | $0.72 | $0.85 | Analysis of Financial Condition This section analyzes the company's financial health, focusing on liquidity, capital resources, and working capital management Liquidity and Capital Resources This section discusses the company's ability to meet its short-term and long-term financial obligations, including capital allocation strategies and future cash requirements Capital Allocation This section outlines the company's strategy for deploying capital, including funding operations, acquisitions, debt reduction, and shareholder returns - The company expects to generate positive operating cash flow to fund operations, strategic acquisitions, greenfield stores, debt reduction, and shareholder returns (dividends and share repurchases)[104] Future Cash Requirements This section details the company's anticipated capital expenditures, contractual lease commitments, and long-term debt obligations - Projected capital expenditures for fiscal 2024 are $35 million to $45 million[106] - Contractual finance and operating lease commitments total $503.1 million, with $97.0 million due within one year[106] - Long-term debt of $55.0 million is outstanding, with no amounts due in the succeeding 12 months[107] Dividends This section reports on cash dividends paid and the company's intention to continue its quarterly dividend practice Cash Dividends Paid (Millions USD) | Period | Per Share | Total | | :-------------------------------- | :-------- | :---------------- | | Three Months Ended Sep 23, 2023 | $0.28 | $8.9M | | Six Months Ended Sep 23, 2023 | $0.56 | $17.9M | - The company has paid quarterly dividends since fiscal 2006 and intends to continue this practice[108] Share Repurchases This section provides an update on the company's share repurchase activities during the reporting period - No shares were repurchased during the six months ended September 23, 2023[110] Working Capital Management This section analyzes the company's working capital position, including the deficit and factors influencing its changes Working Capital Deficit (Millions USD) | Date | Amount | | :----------------- | :-------- | | September 23, 2023 | $(224.5M) | | March 25, 2023 | $(190.7M) | - The increase in working capital deficit was primarily driven by an increase in accounts payable due to the supply chain finance program[111] Sources and Conditions of Liquidity This section identifies the company's primary sources of liquidity and management's assessment of its adequacy for future needs - Primary liquidity sources are cash from operations, availability under the Credit Facility, and cash and equivalents on hand[112] Liquidity Position (Millions USD) | Metric | September 23, 2023 | | :-------------------------- | :------------------- | | Cash and equivalents | $9.1M | | Available under Credit Facility | $514.9M | - Management believes current sources of funds will provide adequate liquidity for both the short-term (12 months) and long-term[113] Summary of Cash Flows This section provides a summary of cash flows from operating, investing, and financing activities, explaining the key drivers of changes Cash provided by operating activities This section details the cash generated from the company's core operations and the factors influencing its period-over-period changes Cash Provided by Operating Activities (Millions USD) for Six Months Ended | Period | Amount | | :------------------- | :-------- | | September 23, 2023 | $98.3M | | September 24, 2022 | $120.3M | - The decrease in cash from operations was influenced by net income, non-cash charges (depreciation, deferred tax expense), and changes in operating assets and liabilities, with the supply chain finance program being a source of cash[116] Cash used for / provided by investing activities This section explains the cash flows related to the acquisition and disposal of long-term assets and strategic investments Cash (Used for) Provided by Investing Activities (Millions USD) for Six Months Ended | Period | Amount | | :------------------- | :-------- | | September 23, 2023 | $(6.7M) | | September 24, 2022 | $37.9M | - The shift from cash provided to cash used was primarily due to capital expenditures ($15.7M) in the current period, compared to significant proceeds from the wholesale tire operations divestiture ($56.6M) in the prior year[119][120] Cash used for financing activities This section details cash flows related to debt, equity, and dividend payments, reflecting the company's capital structure management Cash Used for Financing Activities (Millions USD) for Six Months Ended | Period | Amount | | :------------------- | :-------- | | September 23, 2023 | $(87.5M) | | September 24, 2022 | $(156.4M) | - The decrease in cash used for financing was mainly due to no share repurchases in the current period (vs. $71.2M in prior year), alongside payments on the Credit Facility, finance lease principal, and dividends[121][122] Critical Accounting Estimates This section highlights the significant accounting estimates and assumptions made by management that are crucial to the financial statements - The financial statements rely on management's estimates and assumptions, which are continuously evaluated[123] - No material changes to critical accounting estimates have occurred since the fiscal year ended March 25, 2023[124] Recent Accounting Pronouncements This section refers to Note 1 for a discussion on the impact of recently issued accounting standards on the consolidated financial statements - Refer to Note 1 for a discussion of the impact of recently issued accounting standards on the consolidated financial statements[125] Cautionary Note Regarding Forward-Looking Statements This section advises that the report contains forward-looking statements subject to risks and uncertainties, and the company does not commit to updating them - The report contains forward-looking statements subject to various risks and uncertainties, including economic conditions, competition, technological advancements, and operational costs, that could cause actual results to differ materially[126][127][130] - The company does not undertake any obligation to update these forward-looking statements after the report date[129] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risk primarily from potential changes in interest rates on its floating-rate debt. A 100 basis point change in the Secured Overnight Financing Rate (SOFR) would result in an approximate $0.6 million annual fluctuation in interest expense based on the debt position as of September 23, 2023 - The company's market risk exposure stems from potential changes in interest rates on its floating-rate debt[131] - A 100 basis point change in SOFR would lead to an approximate $0.6 million annual interest expense fluctuation based on the $55.0 million debt outstanding at September 23, 2023[131][132] Item 4. Controls and Procedures The company maintains effective disclosure controls and procedures, which were evaluated by the Chief Executive Officer and Chief Financial Officer as effective as of September 23, 2023. No material changes in internal control over financial reporting occurred during the quarter - Disclosure controls and procedures are designed to ensure timely and accurate reporting to the SEC[133] - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of September 23, 2023[134] - There were no material changes in internal control over financial reporting during the quarter ended September 23, 2023[135] PART II. OTHER INFORMATION This section includes information on legal proceedings, a list of exhibits filed with the report, and the official signatures of the company's authorized officers Item 1. Legal Proceedings The company is involved in various legal proceedings arising from its normal course of business. While these matters are subject to inherent uncertainties, an unfavorable resolution could potentially have a material adverse impact on the company's financial condition and results of operations - The company is a party to various legal proceedings incidental to the conduct of its business[138] - An unfavorable resolution of these legal matters could have a material adverse impact on the company's financial position and results of operations[138] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to the Restated Certificate of Incorporation, an amendment to an employment agreement, and certifications required by the Sarbanes-Oxley Act - Exhibits include Certificate of Amendment of the Restated Certificate of Incorporation, Amendment to Employment Agreement, and Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[140] Signatures The report is duly signed on October 25, 2023, by Michael T. Broderick, President and Chief Executive Officer, and Brian J. D'Ambrosia, Executive Vice President – Finance, Chief Financial Officer and Treasurer, as authorized representatives of Monro, Inc. - The report was signed on October 25, 2023[145] - Signatories include Michael T. Broderick (President and CEO) and Brian J. D'Ambrosia (EVP – Finance, CFO and Treasurer)[145]