MONRO, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Economic Conditions
The United States economy has experienced high inflation during fiscal 2023 and there are market expectations that inflation may remain at elevated levels for a sustained period. In addition, labor availability has continued to be constrained and market labor costs have continued to increase. TheU.S. Federal Reserve Board also has increased interest rates during fiscal 2023 and additional interest rate increases may occur in the coming months. These conditions may give rise to an economic slowdown, and perhaps a recession, and could further increase our costs and/or impact our revenues. It is unclear whether the current economic conditions and government responses to these conditions, including inflation, and increasing interest rates will result in an economic slowdown or recession inthe United States . If that occurs, demand for our products and services may decline, possibly significantly, which may significantly and adversely impact our business, results of operations and financial position.
2023 Divestiture
OnJune 17, 2022 , we completed the sale of assets relating to our wholesale tire operations (seven locations) and internal tire distribution operations toAmerican Tire Distributors, Inc. ("ATD"). The total purchase price was$102 million , consisting of$62 million paid by ATD at closing, of which$5 million is currently being held in escrow, and the remaining$40 million will be paid quarterly over approximately two years based on our tire purchases from or through ATD pursuant to a distribution and fulfillment agreement, of which$4.3 million was received during the three months endedDecember 24, 2022 . For details regarding the sale, see Note 2 to our consolidated financial statements. In the nine months endedDecember 24, 2022 , we experienced lower top-line sales due to the sale of our wholesale tire operations to ATD and we incurred$1.3 million in costs in connection with restructuring and elimination of certain executive management positions upon completion of the divestiture.
Financial Summary
Third quarter 2023 included the following notable items:
?Diluted earnings per common share ("EPS") were
?Adjusted diluted EPS, a non-GAAP measure, were
?Sales decreased 1.9 percent, due to lower overall tire sales because of the sale of our wholesale tire operations.
?Comparable store sales increased 5.6 percent, driven primarily by an approximately 12 percent comparable store sales increase in approximately 300 of our small or underperforming stores. Adjusted for selling days, comparable store sales increased 4.4 percent.
?Operating income of
?Net income was
?Adjusted net income, a non-GAAP measure, was
Earnings Per Common Share Three Months Ended Nine Months Ended
December 25, December 24, December 25,
December 24, 2022 2021 Change 2022 2021 Change
Diluted EPS $ 0.41 $ 0.48 (14.6) % $ 1.17 $ 1.56 (25.0) %
Adjustments 0.02 0.01 0.10 0.09
Adjusted diluted EPS $ 0.43 $ 0.49 (12.2) % $ 1.27 $ 1.66 (23.5) %
Note: Amounts may not foot due to rounding.
Adjusted net income and adjusted diluted EPS, each of which is a measure not derived in accordance withU.S. GAAP, exclude the impact of certain items. Management believes that adjusted net income and adjusted diluted EPS are useful in providing period-to-period comparisons of the results of our operations by excluding certain non-recurring items, such as litigation reserves and costs related to shareholder matters, and items related to store closings as well as Monro.Forward or acquisition initiatives. Reconciliations of these non-GAAP financial measures to GAAP measures are provided beginning on page 20 under "Non-GAAP Financial Measures." We define comparable store sales as sales for locations that have been opened or owned at least one full fiscal year. We believe this period is generally required for new store sales levels to begin to normalize. Management uses comparable store sales to assess the operating performance of the Company's stores and believes the metric is useful to investors because our overall results are dependent upon the results of our stores. Comparable sales measures vary across the retail industry. Therefore, our comparable store sales calculation is not necessarily comparable to similarly titled measures reported by other companies.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Analysis of Results of Operations
Summary of Operating Income Three Months Ended Nine Months Ended
December December December 24, December 25,
(thousands) 24, 2022 25, 2021 Change 2022 2021 Change
Sales $ 335,193 $ 341,781 (1.9) % $ 1,014,546 $ 1,031,298 (1.6) %
Cost of sales, including
distribution and occupancy
costs 221,742 221,199 0.2 662,171 654,102 1.2
Gross profit 113,451 120,582 (5.9) 352,375 377,196 (6.6)
Operating, selling, general
and administrative expenses 89,605 93,146 (3.8) 278,802 287,366 (3.0)
Operating income $ 23,846 $ 27,436 (13.1) % $ 73,573 $ 89,830 (18.1) %
Sales
Sales include automotive undercar repair, tire replacement and tire related service sales, net of discounts, returns, etc., and revenue from the sale of warranty agreements and commissions earned from the delivery of tires. See
Note 7 to our consolidated financial statements for further information. We use comparable store sales to evaluate the performance of our existing stores by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. There were 90 selling days in the three months endedDecember 24, 2022 and 89 selling days in the three months endedDecember 25, 2021 , and 271 selling days in the nine months endedDecember 24, 2022 and 270 selling days in the nine months endedDecember 25, 2021 . We had one additional selling day in the three months and nine months endedDecember 24, 2022 due to a shift in timing of the Christmas holiday from the third quarter in fiscal 2022 to the fourth quarter in fiscal 2023. Sales growth - from both comparable store sales and new stores - represents an important driver of our long-term profitability. We expect that comparable store sales growth will significantly impact our total sales growth. We believe that our ability to successfully differentiate our customers', often referred to as "guests", experience through a careful combination of merchandise assortment, price strategy, convenience, and other factors will, over the long-term, drive both increasing guest traffic and the average ticket amount spent. Sales Three Months Ended
Nine Months Ended
December 25, December 25,
(thousands) December 24, 2022 2021 December 24, 2022 2021
Sales $ 335,193 $ 341,781 $ 1,014,546 $ 1,031,298
Dollar change compared to
prior year $ (6,588) $ (16,752)
Percentage change compared to
prior year (1.9) % (1.6) %
The sales decrease was due to a decrease in sales from closed stores, driven by the sale of our wholesale tire operations in the first quarter of fiscal 2023. Sales for the wholesale locations were approximately$27.7 million in the three months endedDecember 25, 2021 . This was partially offset by an increase in comparable store sales from an increase in average ticket amount across product categories and price points and an increase in sales from new stores. The following table shows the primary drivers of the change in sales for each of the three months and nine months endedDecember 24, 2022 , as compared to the same periods endedDecember 25, 2021 . Sales Percentage Change Three Months Ended Nine Months Ended December 24, 2022 December 24, 2022 Sales change (1.9) % (1.6) % Primary drivers of change in sales Closed store sales (a) (8.5) % (6.1) % Comparable store sales (b)(c) 4.9 % 2.1 % New store sales (d) 1.8 % 2.5 % (a)Sales from the wholesale locations sold to ATD constitute most of the change between the three months endedDecember 24, 2022 andDecember 25, 2021 and the nine months endedDecember 24, 2022 andDecember 25, 2021 . (b)On a comparable store sales basis, comparable store sales increased by 5.6 percent and 2.3 percent for the three months and nine months endedDecember 24, 2022 , respectively. Adjusted for selling days, comparable store sales increased by 4.4 percent and 2.0 percent for the three months and nine months endedDecember 24, 2022 , respectively, on a comparable store sales basis.
(c)On a comparable store sales basis, comparable store sales at our retail
locations increased by 3.2 percent (3.0 percent adjusted for selling days) for
the nine months ended
(d)Sales from the fiscal 2023 acquisition and fiscal 2022 acquisitions represent the change between the three months endedDecember 24, 2022 andDecember 25, 2021 and the nine months endedDecember 24, 2022 andDecember 25, 2021 . Broad-based inflationary pressures impacting consumers, including higher fuel prices and the negative impact on miles driven, partly led to lower demand in some of our key service categories during the three months and nine months endedDecember 24, 2022 . We expect the inflationary environment to continue to impact our customers throughout the remainder of fiscal 2023.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Comparable Store Product
Category Sales Change (a) Three Months Ended Nine Months Ended
December 24, 2022 December 25, 2021 December 24, 2022 December 25, 2021
Tires (b) 8 % 11 % 4 % 15 %
Maintenance service 7 % 11 % 3 % 22 %
Brakes (5) % 28 % (3) % 39 %
Alignment (5) % 28 % (5) % 37 %
Front end/shocks (5) % 14 % (1) % 23 %
Exhaust (7) % 14 % (4) % 18 %
(a)The comparable store product category sales change for the three months and
nine months ended
(b)Adjusted for selling days, comparable store tire sales increased six percent
at our retail locations during the nine months ended
For the three months and nine months endedDecember 25, 2021 , the comparable store sales increase across all product categories reflect higher traffic and higher average ticket sales compared to the prior period in which the coronavirus ("COVID-19") pandemic had a more volatile impact on demand. Sales by Product Category Three Months Ended
Nine Months Ended
December 25,
December 24, 2022 2021 December 24, 2022 December 25, 2021
Tires 53 % 56 % 50 % 53 %
Maintenance service 26 23 26 24
Brakes 12 12 14 13
Steering (a) 8 8 8 8
Exhaust 1 1 2 2
Total 100 % 100 % 100 % 100 %
(a)Steering product category includes front end/shocks and alignment product category sales.
Change in Number of
Company-Operated Retail Stores Three Months Ended Nine Months Ended
December December December December
24, 2022 25, 2021 24, 2022 25, 2021
Beginning store count 1,297 1,288 1,304 1,263
Opened (a) 1 17 4 47
Closed (2) (2) (12) (7)
Ending store count 1,296 1,303 1,296 1,303
(a) The stores opened in the three months and nine months ended
Cost of Sales and Gross Profit
Gross Profit Three Months Ended Nine Months Ended (thousands) December 24, 2022 December 25, 2021 December 24, 2022 December 25, 2021 Gross profit$ 113,451 $ 120,582 $ 352,375 $ 377,196 Percentage of sales 33.8 % 35.3 % 34.7 % 36.6 % Dollar change compared to prior year $ (7,131)$ (24,821) Percentage change compared to prior year (5.9) %
(6.6) %
The decrease in gross profit, as a percentage of sales, of 150 and 190 basis
points ("bps") for the three months and nine months ended December 24, 2022 ,
respectively, as compared to the prior year comparable period were primarily due
to an increase in retail material costs, which increased as a percentage of
sales, as a result of a shift to a higher mix of tire sales at our retail
locations, along with customers trading down to opening price point tires and
because we intentionally did not fully pass through in price increases the
inflationary impact on material costs to a consumer already impacted by
inflationary conditions. The decrease in gross profit, as a percentage of sales,
was also partially due to an increase in technician labor costs, as a percentage
of sales, as we have made incremental investment in technician labor costs
during fiscal 2023 to support current and future sales growth. We do not expect
further significant incremental investment in technician headcount. Partially
offsetting these increases was the impact from our wholesale operations which
were sold during the first three months of fiscal 2023. Additionally, there was
a decrease in distribution and occupancy costs, as a percentage of sales, as we
gained leverage on these largely fixed costs with higher overall comparable
store sales.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Gross Profit as a Percentage of Sales Change Three Months Ended
Nine Months Ended
December 24, 2022 December 24, 2022
Gross profit change (150) bps (190) bps
Primary drivers of change in gross profit as a
percentage of sales
Retail material costs (320) bps (280) bps
Technician labor costs (80) bps (60) bps
Retail distribution and occupancy costs 50 bps 20 bps
Impact from sale of wholesale operations 200 bps 230 bps
OSG&A Expenses
OSG&A Expenses Three Months Ended Nine Months Ended
December 24, December 25, December 24, December 25,
(thousands) 2022 2021 2022 2021
OSG&A Expenses $ 89,605 $ 93,146 $ 278,802 $ 287,366
Percentage of sales 26.7 % 27.3 % 27.5 % 27.9 %
Dollar change compared to prior
year $ (3,541) $ (8,564)
Percentage change compared to
prior year (3.8) % (3.0) %
The decrease of $3.5 million and $8.6 million in OSG&A expenses for the three
months and nine months ended December 24, 2022 , respectively, from the
comparable prior year period is primarily due to decreased expenses from
comparable stores mainly a result of cost control. The decrease in OSG&A
expenses for the three months and nine months ended December 24, 2022 is also
partially due to lower expenses from 14 retail stores closed and our wholesale
tire locations that were sold, as compared to the prior year comparable period.
The decrease in OSG&A expenses for the nine months ended December 24, 2022 is
also partially due to the gain on the sale of our wholesale tire locations and
tire distribution assets, net of closing costs and costs associated with the
closing of a related warehouse and a decrease in litigation reserve/settlement
costs. However, for the three months ended December 24, 2022 , there was an
increase in litigation reserve/settlement costs, primarily related to the
litigation described in Note 9 of our consolidated financial statements.
Partially offsetting these decreases were increased expenses for the three
months and nine months ended December 24, 2022 from five new stores, a full
three months of expenses for stores acquired during the three months ended
December 25, 2021 , and an increase in costs related to shareholder matters.
Three Months Nine Months
OSG&A Expenses Change Ended Ended
December 24, December 24,
(thousands) 2022 2022
OSG&A expenses change $ (3,541) $ (8,564)
Drivers of change in OSG&A expenses
Decrease from comparable stores $ (4,555) $ (1,343) $ (3,057) Decrease from gain on sale of wholesale tire locations and tire distribution assets, net $ -$ (1,968) Increase / (decrease) in litigation reserve/settlement costs$ 450 $ (3,470) Increase from new stores$ 1,671 $ 6,812 Increase in management restructuring costs $ -
Other Performance Factors Net Interest Expense Net interest expense of$5.9 million for the three months endedDecember 24, 2022 increased$0.3 million as compared to the prior year period, and increased as a percentage of sales from 1.7 percent to 1.8 percent. Weighted average debt outstanding for the three months endedDecember 24, 2022 decreased by approximately$92 million as compared to the three months endedDecember 25, 2021 . This decrease is primarily related to a decrease in debt outstanding under the Credit Facility. The weighted average interest rate increased approximately 100 basis points from the prior year quarter due primarily to an increase in the Credit Facility's floating borrowing rates. Net interest expense for the nine months endedDecember 24, 2022 decreased$1.6 million as compared to the same period in the prior year, and decreased from 1.8 percent to 1.7 percent as a percentage of sales for the same periods. Weighted average debt outstanding decreased by approximately$83 million and the weighted average interest rate increased approximately 30 basis points as compared to the same period of the prior year.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Provision for Income Taxes
Our effective income tax rate for the three months and nine months endedDecember 24, 2022 was 27.6 percent and 31.7 percent, respectively, compared to 25.3 percent and 25.5 percent in the comparable prior-year periods. Our effective income tax rate for the nine months endedDecember 24, 2022 was higher by 4.7 percent because of discrete tax impacts from the divestiture of assets relating to our wholesale tire operations and internal tire distribution operations as well as the revaluation of deferred tax balances due to changes in the mix of pre-tax income in variousU.S. state jurisdictions because of the divestiture. Our effective income tax rate for the three months and nine months endedDecember 24, 2022 was higher by 0.9 percent and 0.7 percent, respectively, due to the discrete tax impact related to share-based awards. Additionally, the increase in our effective income tax rate for the three months and nine months endedDecember 24, 2022 over the prior year comparable period was also due to other state income tax impacts from the divestiture.
Non-GAAP Financial Measures
In addition to reporting net income and diluted EPS, which are GAAP measures, this Form 10-Q includes adjusted net income and adjusted diluted EPS, which are non-GAAP financial measures. We have included reconciliations to adjusted net income and adjusted diluted EPS from our most directly comparable GAAP measures, net income and diluted EPS, below. Management views these non-GAAP financial measures as indicators to better assess comparability between periods because management believes these non-GAAP financial measures reflect our core business operations while excluding certain non-recurring items, such as litigation reserves and costs related to shareholder matters, and items related to store closings as well as Monro.Forward or acquisition initiatives. These non-GAAP financial measures are not intended to represent, and should not be considered more meaningful than, or as an alternative to, their most directly comparable GAAP measures. These non-GAAP financial measures may be different from similarly titled non-GAAP financial measures used by other companies.
Adjusted net income is summarized as follows:
Reconciliation of Adjusted Net Income Three Months Ended Nine Months Ended
December 24, December 25, December 24, December 25,
(thousands) 2022 2021 2022 2021
Net income $ 13,034 $ 16,287 $ 38,639 $ 52,953
Gain on sale of wholesale tire locations
and tire distribution assets, net (a) - - (1,968) -
Store closing costs 6 5 232 (425)
Monro.Forward initiative costs 68 418 110 569
Acquisition due diligence and
integration costs - 170 (9) 590
Litigation reserve/settlement costs 450 (161) 450 3,759
Management restructuring/transition
costs (b) - - 1,338 59
Costs related to shareholder matters 236 - 553 -
Provision for income taxes on pre-tax
adjustments (191) (104) (178) (1,101)
Certain discrete tax items (c) - - 2,644 -
Adjusted net income $ 13,603 $ 16,615 $ 41,811 $ 56,404 (a)Amount includes gain on sale, net of closing costs and costs associated with the closing of a related warehouse.
(b)Costs incurred in fiscal 2023 in connection with restructuring and elimination of certain executive management positions upon completion of our sale of wholesale tire locations and tire distribution assets.
(c)Certain discrete items related to the sale of our wholesale tire locations and tire distribution assets as well as the revaluation of deferred tax balances due to changes in the mix of pre-tax income in variousU.S. state jurisdictions because of the sale. In the Reconciliation of Adjusted Net Income, we determined the Provision for income taxes on pre-tax adjustments by calculating our estimated annual effective income tax rate on pre-tax income before giving effect to any discrete tax items and applying it to the pre-tax adjustments.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Adjusted diluted EPS is summarized as follows:
Reconciliation of Adjusted Diluted EPS Three Months Ended
Nine Months Ended
December 25, December 24, December 25,
December 24, 2022 2021 2022 2021
Diluted EPS $ 0.41 $ 0.48 $ 1.17 $ 1.56
Gain on sale of wholesale tire locations
and tire distribution assets, net - - (0.05) -
Store closing costs (a) 0.00 0.00 0.01 (0.01)
Monro.Forward initiative costs (a) 0.00 0.01 0.00 0.01
Acquisition due diligence and
integration costs (a) - 0.00 (0.00) 0.01
Litigation reserve/settlement costs (a) 0.01 (0.00) 0.01 0.08
Management restructuring/transition
costs (a) - - 0.03 0.00
Costs related to shareholder matters 0.01 - 0.02 -
Certain discrete tax items - - 0.08 -
Adjusted diluted EPS $ 0.43 $ 0.49 $ 1.27 $ 1.66 (a) Amounts, in the periods presented, may be too minor in amount, net of the impact from income taxes, to have an impact on the calculation of adjusted diluted EPS.
Note: The calculation of the impact of non-GAAP adjustments on diluted EPS is performed on each line independently. The table may not add down by +/-$0.01 due to rounding. The pre-tax adjustments to diluted EPS reflect estimated annual effective income tax rates on pre-tax income before giving effect to discrete items of 25.1 percent and 24.1 percent for the three months endedDecember 24, 2022 andDecember 25, 2021 , respectively, and 25.1 percent and 24.2 percent for the nine months endedDecember 24, 2022 andDecember 25, 2021 , respectively. See the pre-tax adjustments from the Reconciliation of Adjusted Net Income table above for pre-tax amounts.
Analysis of Financial Condition
Liquidity and Capital Resources
Capital Allocation
We expect to continue to generate positive operating cash flow as we have done in the last three fiscal years. The cash we generate from our operations will allow us to continue to support business operations as well as invest in attractive acquisition opportunities intended to drive long-term sustainable growth, pay down debt, return cash to our shareholders through our dividend program and repurchase shares of our common stock under our common stock repurchase program. In addition, because we believe a large portion of our future expenditures will be to fund our growth, through acquisition of retail stores and/or opening greenfield stores, we continually evaluate our cash needs and may decide it is best to fund the growth of our business through borrowings on our Credit Facility. Conversely, we may also periodically determine that it is in our best interests to voluntarily repay certain indebtedness early.
Material Cash Requirements
We currently expect our capital expenditures to support our projects, including upgrading our facilities and systems, to be$35 million to$45 million in the aggregate in 2023. Additionally, we have contractual finance lease and operating lease commitments with landlords throughOctober 2040 for$539.9 million in lease payments, of which$96.8 million is due within one year. For details regarding these lease commitments, see Note 9 to our consolidated financial statements.
As of
We paid cash dividends totaling
Note 6 to our consolidated financial statements.
We returned$96.9 million to shareholders through share repurchases during the nine months endedDecember 24, 2022 . For details regarding our share repurchase program, see Part II , Item 2 , " Unregistered Sales of Equity Securities and Use of Proceeds " of this report and Note 10 to our consolidated financial statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
We have signed a definitive asset purchase agreement to acquire five retail tire
and automotive repair stores located in Iowa and Illinois . This transaction is
expected to close during the fourth quarter of fiscal 2023 and is expected to be
financed through our Credit Facility.
Working Capital Management
We work with suppliers to optimize payment terms and conditions on accounts payable to enhance timing of working capital and cash flows. As part of these efforts, we facilitate a voluntary supply chain finance program to provide suppliers with the opportunity to sell receivables due from Monro to a participating financial institution. For details regarding our supply chain finance program, see Note 1 to our consolidated financial statements.
Sources and Conditions of Liquidity
Our sources to fund our material cash requirements are predominantly cash from operations, availability under our Credit Facility, and cash and equivalents on hand.
As of
We believe that our current sources of funds will provide us with adequate
liquidity during the 12-month period following
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