Monro(MNRO) - 2024 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Monro, Inc.'s unaudited condensed consolidated financial statements detail financial position, performance, and cash movements Consolidated Balance Sheets The Consolidated Balance Sheets detail the company's financial position, showing changes in assets, liabilities, and equity | Metric | December 23, 2023 (thousands) | March 25, 2023 (thousands) | | :-------------------------------- | :----------------------------- | :-------------------------- | | Cash and equivalents | $23,846 | $4,884 | | Total current assets | $271,694 | $258,467 | | Total assets | $1,733,097 | $1,776,877 | | Total current liabilities | $486,632 | $449,177 | | Total liabilities | $1,073,379 | $1,081,955 | | Total shareholders' equity | $659,718 | $694,922 | - Cash and equivalents significantly increased from $4.884 million to $23.846 million as of December 23, 2023[9] - Total assets decreased from $1,776.877 million to $1,733.097 million, while total liabilities slightly decreased from $1,081.955 million to $1,073.379 million[9] Consolidated Statements of Income and Comprehensive Income Consolidated Statements of Income detail financial performance, showing decreased sales and net income for the period | Metric (thousands) | Three Months Ended Dec 23, 2023 | Three Months Ended Dec 24, 2022 | Nine Months Ended Dec 23, 2023 | Nine Months Ended Dec 24, 2022 | | :----------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Sales | $317,653 | $335,193 | $966,712 | $1,014,546 | | Gross profit | $112,677 | $113,451 | $342,046 | $352,375 | | Operating income | $21,383 | $23,846 | $61,087 | $73,573 | | Net income | $12,170 | $13,034 | $33,871 | $38,639 | | Basic EPS | $0.38 | $0.41 | $1.06 | $1.18 | | Diluted EPS | $0.38 | $0.41 | $1.05 | $1.17 | - Sales decreased by 5.2% for the three months and 4.7% for the nine months ended December 23, 2023, compared to the prior year periods[11][78] - Net income decreased by 6.6% for the three months and 12.3% for the nine months ended December 23, 2023, compared to the prior year periods[11] Consolidated Statements of Changes in Shareholders' Equity Shareholders' Equity statements detail movements in net income, dividends, and share repurchases | Metric (thousands) | Nine Months Ended Dec 23, 2023 | Nine Months Ended Dec 24, 2022 | | :----------------- | :----------------------------- | :----------------------------- | | Net income | $33,871 | $38,639 | | Preferred dividends | $(804) | $(386) | | Common dividends | $(25,992) | $(27,096) | | Repurchase of stock | $(44,467) | $(96,919) | - The company repurchased $44.467 million of stock during the nine months ended December 23, 2023, a decrease from $96.919 million in the prior year[14] - Common dividends declared were $0.84 per common share for both nine-month periods[15] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows summarize cash from operating, investing, and financing activities | Metric (thousands) | Nine Months Ended Dec 23, 2023 | Nine Months Ended Dec 24, 2022 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Cash provided by operating activities | $130,463 | $171,191 | | Cash (used for) provided by investing activities | $(285) | $35,551 | | Cash used for financing activities | $(111,216) | $(201,691) | | Increase in cash and equivalents | $18,962 | $5,051 | | Cash and equivalents at end of period | $23,846 | $12,999 | - Cash provided by operating activities decreased to $130.5 million from $171.2 million in the prior year, primarily due to changes in operating assets and liabilities[117][118] - Investing activities shifted from providing $35.6 million in cash to using $0.3 million, largely due to lower proceeds from divestitures[120][121] - Cash used for financing activities decreased significantly from $201.7 million to $111.2 million, driven by lower principal payments on debt and reduced stock repurchases[122][123] Notes to Consolidated Financial Statements The Notes to Consolidated Financial Statements provide detailed explanations and additional information on the figures presented in the financial statements Note 1 – Description of Business and Basis of Presentation Monro, Inc. operates 1,296 retail stores across 32 states, focusing on automotive repair and tire services as a single segment - Monro, Inc. operates 1,296 company-operated retail stores and 51 franchised locations in 32 states, focusing on automotive undercar repair and tire services[21] - The company's operations are organized and managed as one single segment[23] - Recent accounting guidance for supplier finance programs and contract assets/liabilities in business combinations was adopted in fiscal 2024, with no material impact[27][28] Note 2 – Acquisitions and Divestitures Monro acquired six retail stores and divested wholesale tire operations, receiving earnout payments with some outstanding - Monro acquired six retail tire and automotive repair stores in 2023 as part of its strategic expansion[38] - The divestiture of wholesale tire operations in June 2022 yielded $62 million at closing, with $11.1 million in earnout received in fiscal 2024 and $20.2 million outstanding[40] - A pre-tax gain of $2.4 million was recognized from the divestiture, which allows the company to focus on its core retail business[40][42] Note 3 – Earnings per Common Share Basic and diluted EPS calculations show a slight decrease for the three and nine months ended December 23, 2023 | Metric (thousands, except per share data) | Three Months Ended Dec 23, 2023 | Three Months Ended Dec 24, 2022 | Nine Months Ended Dec 23, 2023 | Nine Months Ended Dec 24, 2022 | | :---------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $12,170 | $13,034 | $33,871 | $38,639 | | Less: Preferred stock dividends | $(337) | $(129) | $(804) | $(386) | | Income available to common shareholders | $11,833 | $12,905 | $33,067 | $38,253 | | Basic earnings per common share | $0.38 | $0.41 | $1.06 | $1.18 | | Diluted earnings per common share | $0.38 | $0.41 | $1.05 | $1.17 | - Diluted EPS for the three months ended December 23, 2023, was $0.38, down from $0.41 in the prior year, and for the nine months was $1.05, down from $1.17[45] Note 4 – Income Taxes Effective income tax rates decreased due to state taxes, share-based awards, and absence of prior year divestiture impacts | Period | Effective Income Tax Rate | | :------------------------- | :------------------------ | | 3 Months Ended Dec 23, 2023 | 25.8% | | 9 Months Ended Dec 23, 2023 | 26.7% | | 3 Months Ended Dec 24, 2022 | 27.6% | | 9 Months Ended Dec 24, 2022 | 31.7% | - The effective income tax rate for the nine months ended December 24, 2022, was higher by 4.7% due to discrete tax impacts from the wholesale tire operations divestiture and revaluation of deferred tax balances[46] Note 5 – Fair Value Long-term debt's carrying amount approximated its fair value at $94.0 million due to its variable interest rate | Metric | December 23, 2023 (millions) | March 25, 2023 (millions) | | :------------- | :--------------------------- | :------------------------ | | Long-term debt | $94.0 | $105.0 | - The carrying value of long-term debt approximates its fair value due to its variable interest nature[47] Note 6 – Cash Dividend Monro paid $26.8 million in cash dividends, with future dividends at Board discretion and subject to Credit Facility covenants | Metric (millions) | Nine Months Ended Dec 23, 2023 | | :---------------- | :----------------------------- | | Dividends paid | $26.8 | - The declaration of future dividends is at the discretion of the Board of Directors and depends on financial condition, results of operations, capital requirements, and compliance with Credit Facility covenants[48] Note 7 – Revenues Revenues primarily from automotive repair and tire sales, with deferred revenue from road hazard warranties recognized over time | Revenue Category (thousands) | Three Months Ended Dec 23, 2023 | Nine Months Ended Dec 23, 2023 | | :--------------------------- | :------------------------------ | :----------------------------- | | Tires | $161,116 | $467,069 | | Maintenance | $84,179 | $267,325 | | Brakes | $39,824 | $133,663 | | Steering | $24,490 | $78,851 | | Exhaust | $5,031 | $15,386 | | Franchise royalties | $3,013 | $4,418 | | Total | $317,653 | $966,712 | - Deferred revenue from road hazard warranty agreements was $22.1 million as of December 23, 2023, with $5.1 million expected to be recognized in the remainder of fiscal 2024[53][54] Note 8 – Long-term Debt Monro's long-term debt includes a $600 million revolving Credit Facility, with $94.0 million outstanding and compliance with covenants - The Credit Facility is a five-year $600 million revolving credit facility, extended to November 10, 2027, with interest rates based on SOFR[56][57][59] | Metric | December 23, 2023 (millions) | | :------------------------- | :--------------------------- | | Outstanding under Credit Facility | $94.0 | | Available under Credit Facility | $475.9 | - The company was in compliance with all debt covenants, including an interest coverage ratio of at least 1.55 to 1 and an adjusted debt to EBITDAR ratio not exceeding 4.75 to 1[61] Note 9 – Commitments and Contingencies Total commitments are $718.3 million, including debt and lease obligations, with potential adverse impact from legal proceedings | Commitment Type (thousands) | Total | Within 1 Year | | :-------------------------- | :----------- | :------------ | | Principal payments on long-term debt | $94,000 | $0 | | Finance lease commitments | $365,192 | $51,045 | | Operating lease commitments | $259,079 | $46,356 | | Total | $718,271 | $97,401 | - The company is involved in legal proceedings, and unfavorable rulings could have a material adverse impact on its financial position and results of operations[63] Note 10 – Supplier Finance Program Monro facilitates a voluntary supply chain financing program for suppliers, with $168.4 million in eligible outstanding obligations - Monro operates a voluntary supply chain financing program for suppliers to sell receivables to a financial institution[64] - The program is considered a trade payable program, not a borrowing arrangement[64] | Metric (millions) | December 23, 2023 | March 25, 2023 | December 24, 2022 | | :------------------------------------ | :---------------- | :------------- | :---------------- | | Outstanding supplier obligations eligible for advance payment | $168.4 | $167.3 | $133.9 | Note 11 – Share Repurchase Monro repurchased 1.54 million common shares for $44.0 million under a board-authorized program, including excise tax | Metric (thousands, except per share data) | Three Months Ended Dec 23, 2022 | Nine Months Ended Dec 23, 2023 | | :---------------------------------------- | :------------------------------ | :----------------------------- | | Number of shares purchased | 1,543.6 | 1,543.6 | | Average price paid per share | $28.50 | $28.50 | | Total repurchased | $43,997 | $43,997 | - The share repurchase activity includes an excise tax of $0.4 million for the three and nine months ended December 23, 2023[67] Note 12 – Equity Capital Structure Reclassification Monro reclassified Class C Convertible Preferred Stock and shareholders approved declassifying the Board of Directors - A reclassification agreement was made to eliminate Class C Convertible Preferred Stock, with an adjusted conversion rate of 61.275 common shares per preferred share[69][70] - Shareholders approved an amendment to declassify the Board of Directors, transitioning to one-year terms for all directors starting from the 2025 annual meeting[71] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition, operations, liquidity, non-GAAP measures, and forward-looking statements Recent Developments No material recent developments affected Monro's financial reporting during the quarter ended December 23, 2023 - No material recent developments occurred during the quarter ended December 23, 2023, that affected financial reporting[73] Economic Conditions U.S. economic conditions, including inflation and interest rates, may impact demand and increase costs for Monro - The U.S. economy faced higher inflation, constrained labor availability, and increased interest rates in fiscal 2023 and 2024[74] - These economic conditions could lead to a slowdown or recession, potentially decreasing demand for products and services and increasing operational costs[74] Financial Summary Third quarter diluted EPS was $0.38, with sales decreasing 5.2% due to lower comparable store sales | Metric | Three Months Ended Dec 23, 2023 | Three Months Ended Dec 24, 2022 | Nine Months Ended Dec 23, 2023 | Nine Months Ended Dec 24, 2022 | | :--------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Diluted EPS | $0.38 | $0.41 | $1.05 | $1.17 | | Adjusted diluted EPS | $0.39 | $0.43 | $1.11 | $1.27 | - Sales decreased 5.2% for the three months ended December 23, 2023, primarily due to a 6.1% decrease in comparable store sales[77] - Operating income was $21.4 million, a 10.3% decrease from the prior year, and net income was $12.2 million[77] Analysis of Results of Operations Sales decreased due to lower comparable store sales, while gross profit percentage increased from tire mix and staffing | Metric (thousands) | Three Months Ended Dec 23, 2023 | Three Months Ended Dec 24, 2022 | Nine Months Ended Dec 23, 2023 | Nine Months Ended Dec 24, 2022 | | :----------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Sales | $317,653 | $335,193 | $966,712 | $1,014,546 | | Gross profit | $112,677 | $113,451 | $342,046 | $352,375 | | Operating income | $21,383 | $23,846 | $61,087 | $73,573 | | Sales Percentage Change | Three Months Ended Dec 23, 2023 | Nine Months Ended Dec 23, 2023 | | :---------------------- | :------------------------------ | :----------------------------- | | Sales change | (5.2)% | (4.7)% | | Comparable store sales | (6.1)% | (2.7)% | | Closed store sales | (0.1)% | (2.6)% | | New store sales | 0.3% | 0.4% | | Franchise royalties | 0.7% | 0.2% | | Comparable Store Product Category Sales Change | Three Months Ended Dec 23, 2023 | | :--------------------------------------------- | :------------------------------ | | Tires | (9)% | | Maintenance service | (3)% | | Brakes | (1)% | | Alignment | (5)% | | Front end/shocks | (5)% | - Gross profit as a percentage of sales increased by 170 basis points for the three months and 70 basis points for the nine months ended December 23, 2023, driven by tire mix improvement and reduced technician labor costs[89][90][91] OSG&A Expenses OSG&A expenses increased due to comparable/new store costs, optimization, and relocation, partially offset by other decreases | Metric (thousands) | Three Months Ended Dec 23, 2023 | Three Months Ended Dec 24, 2022 | Nine Months Ended Dec 23, 2023 | Nine Months Ended Dec 24, 2022 | | :----------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | OSG&A Expenses | $91,294 | $89,605 | $280,959 | $278,802 | | Percentage of sales | 28.7% | 26.7% | 29.1% | 27.5% | - The increase in OSG&A expenses was driven by comparable and new store costs, back-office optimization, and corporate headquarters relocation, partially offset by decreases from closed stores and litigation reserve/settlement costs[93][94] Other Performance Factors Net interest expense decreased from lower debt, while the effective tax rate decreased due to the absence of prior divestiture impacts | Metric (millions) | Three Months Ended Dec 23, 2023 | Nine Months Ended Dec 23, 2023 | | :---------------- | :------------------------------ | :----------------------------- | | Net interest expense | $5.0 | $15.1 | - Weighted average debt outstanding decreased by approximately $104 million for the three months and $121 million for the nine months ended December 23, 2023, compared to prior year[95][96] | Period | Effective Income Tax Rate | | :------------------------- | :------------------------ | | 3 Months Ended Dec 23, 2023 | 25.8% | | 9 Months Ended Dec 23, 2023 | 26.7% | | 3 Months Ended Dec 24, 2022 | 27.6% | | 9 Months Ended Dec 24, 2022 | 31.7% | Non-GAAP Financial Measures Monro uses adjusted net income and diluted EPS as non-GAAP measures, excluding non-recurring items for comparability | Metric (thousands) | Three Months Ended Dec 23, 2023 | Three Months Ended Dec 24, 2022 | Nine Months Ended Dec 23, 2023 | Nine Months Ended Dec 24, 2022 | | :----------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net income | $12,170 | $13,034 | $33,871 | $38,639 | | Adjusted net income | $12,546 | $13,603 | $35,726 | $41,811 | | Metric | Three Months Ended Dec 23, 2023 | Three Months Ended Dec 24, 2022 | Nine Months Ended Dec 23, 2023 | Nine Months Ended Dec 24, 2022 | | :--------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Diluted EPS | $0.38 | $0.41 | $1.05 | $1.17 | | Adjusted diluted EPS | $0.39 | $0.43 | $1.11 | $1.27 | - Non-GAAP adjustments exclude items like costs related to shareholder matters, back-office optimization, corporate headquarters relocation, store closings, acquisition due diligence, litigation, management restructuring, and the net gain/loss on the sale of wholesale tire and distribution assets[98][99] Analysis of Financial Condition Monro expects positive operating cash flow for growth and debt repayment, with a working capital deficit and liquidity from cash and Credit Facility - Monro's capital allocation strategy focuses on generating positive operating cash flow to support business operations, invest in acquisitions, pay down debt, return cash to shareholders via dividends, and repurchase common stock[106] - Expected capital expenditures for fiscal 2024 are $30 million to $35 million[108] | Metric (millions) | December 23, 2023 | March 25, 2023 | | :------------------------ | :---------------- | :------------- | | Working capital deficit | $214.9 | $190.7 | | Cash and equivalents | $23.8 | - | | Available Credit Facility | $475.9 | - | - The working capital deficit increased by $24.2 million, primarily due to an increase in accounts payable from the supply chain finance program[112] Summary of Cash Flows Cash flows show $130.5 million from operations, $0.3 million used in investing, and $111.2 million used in financing | Metric (thousands) | Nine Months Ended Dec 23, 2023 | Nine Months Ended Dec 24, 2022 | | :--------------------------------- | :----------------------------- | :----------------------------- | | Cash provided by operating activities | $130,463 | $171,191 | | Cash (used for) provided by investing activities | $(285) | $35,551 | | Cash used for financing activities | $(111,216) | $(201,691) | | Increase in cash and equivalents | $18,962 | $5,051 | | Cash and equivalents at end of period | $23,846 | $12,999 | - Operating cash flow decreased due to changes in operating assets and liabilities, despite improvements from the supply chain finance program[117][118] - Investing activities shifted to a net cash outflow, primarily due to capital expenditures partially offset by divestiture-related payments[120] - Financing cash outflow decreased significantly, driven by lower net payments on the Credit Facility and reduced stock repurchases[122][123] Critical Accounting Estimates Monro's critical accounting estimates remain unchanged since the Form 10-K for fiscal year ended March 25, 2023 - There have been no material changes to the company's critical accounting estimates since the Form 10-K for the fiscal year ended March 25, 2023[125] Recent Accounting Pronouncements Impact of recent accounting standards on financial statements is discussed in Note 1 - Refer to Note 1 for a discussion of the impact of recently issued accounting standards[126] Cautionary Note Regarding Forward-Looking Statements This section provides a cautionary note on forward-looking statements, highlighting risks and uncertainties - The report contains forward-looking statements subject to risks and uncertainties that could cause actual results to differ materially[127] - Key risk factors include competitive services and pricing, economic conditions, automotive technology changes, dependence on third-party vendors, debt obligations, capital expenditures, sales, gross profit margin, OSG&A expenses, income tax liabilities, critical accounting policies, industry regulation, litigation, business interruptions, data security, acquisitions, growth plans, dividend payments, personnel, and climate change[128][131] Item 3. Quantitative and Qualitative Disclosures About Market Risk Monro faces market risk from interest rate changes on floating rate debt, with a 100 bps SOFR change impacting interest expense by $0.9 million - Monro is exposed to market risk from potential changes in interest rates, specifically on its floating rate debt[132] - A 100 basis point change in SOFR would result in approximately $0.9 million annual interest expense fluctuation based on the debt position at December 23, 2023[132] | Metric | December 23, 2023 (millions) | March 25, 2023 (millions) | | :------------- | :--------------------------- | :------------------------ | | Debt financing | $94.0 | $105.0 | Item 4. Controls and Procedures Disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective as of December 23, 2023[135] - No material changes in internal control over financial reporting occurred during the quarter ended December 23, 2023[136] PART II. OTHER INFORMATION Item 1. Legal Proceedings Monro is involved in legal proceedings, where unfavorable resolutions could materially impact financial condition and operations - Monro is a party to various legal proceedings incidental to its business[138] - Unfavorable rulings in legal matters could have a material adverse impact on the company's financial position and results of operations[138] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Monro repurchased 1.54 million shares for $43.997 million under a $150 million program, with $9.150 million remaining - The Board of Directors authorized a $150 million share repurchase program with no stated expiration[139] | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :-------------------------------------- | :------------------------------- | :--------------------------- | | September 24, 2023 through October 21, 2023 | — | — | | October 22, 2023 through November 25, 2023 | 799,002 | $27.46 | | November 26, 2023 through December 23, 2023 | 744,565 | $29.63 | | Total | 1,543,567 | $28.50 | - As of December 23, 2023, $9.150 million remained available for repurchase under the program[140] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including agreements, certifications, and XBRL data - Exhibits include a Supply Agreement, Amended and Restated Employment Agreements, Certifications under the Sarbanes-Oxley Act, and XBRL Instance Document and Taxonomy Extensions[142] Signatures The report is duly signed by Monro, Inc.'s President and CEO, and EVP, CFO, and Treasurer on January 24, 2024 - The report was signed by Michael T. Broderick, President and Chief Executive Officer, and Brian J. D'Ambrosia, Executive Vice President – Finance, Chief Financial Officer and Treasurer, on January 24, 2024[148]