MONRO, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Summary
Third quarter 2022 included the following notable items:
?Diluted earnings per common share ("EPS") were
?Adjusted diluted EPS, a non-GAAP measure, were
?Sales increased 20.1 percent, driven by an increase in comparable store sales.
?Comparable store sales increased 13.8 percent from the prior year comparable period, driven primarily by an increase in average ticket amount.
?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 26, December 26,
2021 2020 Change December 25, 2021 2020 Change
Diluted EPS $ 0.48 $ 0.20 140.0 % $ 1.56 $ 0.67 132.8 %
Adjustments 0.01 0.01 0.09 0.09
Adjusted diluted EPS $ 0.49 $ 0.22 122.7 % $ 1.66 $ 0.77 115.6 %
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 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 19 under "Non-GAAP Financial Measures." We define comparable store sales, or same store sales, as sales for stores 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. Impact of COVID-19 The full impact of the COVID-19 pandemic will depend on factors such as the length of time of the pandemic; how federal, state and local governments are responding; the efficacy and distribution of the COVID-19 vaccines; the longer-term impact of the pandemic on the economy and consumer behavior; and the effect on our customers, referred to as "guests"; employees, referred to as "teammates"; vendors and other partners.
During this time, we are focused on protecting the health and safety of our teammates and guests, while seeking to continue operating our business responsibly.
During this period when vaccine distribution has increased and more businesses are operating at levels similar to pre-pandemic capacity, we have experienced labor inefficiencies and a shortage of teammates in some of our store locations. If we are unable to fill enough teammate positions, we may be unable to earn as much revenue as if we were fully staffed. We have had to pay more for labor because our teammates continue working overtime in order to meet the surge in demand, which, along with an incremental investment we made in technician labor costs to support current and future sales growth amidst improving consumer demand trends, increased our technician labor costs as a percentage of sales and may decrease our gross profit and net income if not offset by other factors. Although we are experiencing unprecedented challenges during this pandemic, we continue our focus to remain as efficient as possible while still offering safe and high quality service to our guests. While we expect many teammates to return to our offices in the future, the timing of such a return could be affected by resurgences of COVID-19 in areas where our offices are located. When we return to our offices, we expect many teammates to continue to work in a hybrid of in-person and remote work. These changes to our operations going forward may present additional challenges and increased costs to ensure our offices are safe and functional for hybrid work that enable effective collaboration of both in-person and remote teammates.
--------------------------------------------------------------------------------
Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS
Given the level of volatility and uncertainty surrounding the future impact of
COVID-19, we cannot estimate with certainty the long-term impacts of the
COVID-19 pandemic on our business, financial condition, results of operations,
and cash flows.
Analysis of Results of Operations
Summary of Operating Income Three Months Ended Nine Months Ended
December December December 25, December
(thousands) 25, 2021 26, 2020 Change 2021 26, 2020 Change
Sales $ 341,781 $ 284,591 20.1 % $ 1,031,298 $ 820,237 25.7 %
Cost of sales, including
distribution and
?occupancy costs 221,199 188,453 17.4 654,102 532,119 22.9
Gross profit 120,582 96,138 25.4 377,196 288,118 30.9
Operating, selling, general
and administrative expenses 93,146 80,450 15.8 287,366 236,603 21.5
Operating income $ 27,436 $ 15,688 74.9 % $ 89,830 $ 51,515 74.4 %
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 8 to the Company's 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 89 selling days in the three months endedDecember 25, 2021 and in the three months endedDecember 26, 2020 , and 270 selling days in the nine months endedDecember 25, 2021 and in the nine months endedDecember 26, 2020 . 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 guests' experience through a careful combination of merchandise assortment, price, convenience, guest experience, and other factors will, over the long-term, drive both increasing guest traffic and the average ticket amount. Sales Three Months Ended Nine Months Ended December December December 25, December (thousands) 25, 2021 26, 2020 2021 26, 2020 Sales$ 341,781 $ 284,591 $ 1,031,298 $ 820,237 Dollar change compared to prior year$ 57,190 $
211,061
Percentage change compared to prior year 20.1 %
25.7 %
The sales increase was primarily due to an increase in comparable store sales from an increase in average ticket amount as comparable store sales growth increased across our product categories with higher growth in our tires, maintenance and brakes categories. Additionally, there was an increase in sales from new stores. Partially offsetting these increases was a decrease in sales from closed stores. The following table shows the primary drivers of the change in sales for each of the three months and nine months endedDecember 25, 2021 , as compared to the same period endedDecember 26, 2020 . Three Months Nine Months Sales Percentage Change Ended Ended December December 25, 2021 25, 2021 Sales change 20.1 % 25.7 % Primary drivers of change in sales Comparable stores sales 13.8 % 20.3 % New store sales (a) 6.5 % 6.2 % Closed store sales (0.1) % (0.6) % (a)Sales from 2022 and 2021 acquisitions contributed 6.4 percent and 6.0 percent of the sales change for the three months and the nine months endedDecember 25, 2021 , respectively.
--------------------------------------------------------------------------------
Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS
As the COVID-19 pandemic has evolved, demand for automotive undercar repair
services as well as replacement tires and tire related services continues to be
volatile. During the three months and nine months ended December 25, 2021 ,
comparable store sales growth increased across our product categories with
higher growth in our higher-margin brakes, alignment and maintenance categories,
as well as our tire category, each of which experienced declines during the
three months and nine months ended December 26, 2020 .
Comparable Store Product Category Sales Change Three Months Ended
Nine Months Ended
December 25, December 26, December 25, December
2021 2020 2021 26, 2020
Tires 11 % (8) % 15 % (8) %
Maintenance 11 % (19) % 22 % (24) %
Brakes 28 % (21) % 39 % (30) %
Alignment 28 % (16) % 37 % (21) %
Front end/shocks 14 % (17) % 23 % (25) %
Exhaust 14 % (17) % 18 % (24) %
Sales by Product Category Three Months Ended Nine Months Ended
December 25, December December 25, December
2021 26, 2020 2021 26, 2020
Tires 56 % 57 % 53 % 56 %
Maintenance 23 23 24 24
Brakes 12 11 13 12
Steering (a) 8 7 8 7
Exhaust 1 2 2 1
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 Three Months
Stores Ended Nine Months Ended
December December December December
25, 2021 26, 2020 25, 2021 26, 2020
Beginning store count 1,288 1,242 1,263 1,283
Opened (a) 17 19 47 20
Closed (2) (1) (7) (43)
Ending store count 1,303 1,260 1,303 1,260
(a)The stores opened are primarily stores acquired from the 2022 and 2021 acquisitions.
Cost of Sales and Gross Profit
Gross Profit Three Months Ended Nine Months Ended
December 25, December 26, December 25, December 26,
(thousands) 2021 2020 2021 2020
Gross profit $ 120,582 $ 96,138 $ 377,196 $ 288,118
Percentage of sales 35.3 % 33.8 % 36.6 % 35.1 %
Dollar change compared to prior year $ 24,444 $ 89,078
Percentage change compared to prior year 25.4 %
30.9 %
The increase in gross profit, as a percentage of sales, of 150 basis points
("bps") for the three months and nine months ended December 25, 2021 , as
compared to the prior year comparable period, was primarily due to a decrease in
material costs, as a percentage of sales, as a result of a shift in sales mix
from tires to our higher margin service categories. Additionally, through the
use of our tire category and management pricing tool, we expanded our gross
profit per tire from the prior year comparable period. The increase in gross
profit, as a percentage of sales, was also partially due to 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. Partially offsetting these decreases was an increase in technician labor
costs, which increased as a percentage of sales, as we made an incremental
investment in technician labor costs to support current and future sales growth
amidst improving consumer demand trends for our product and service categories.
--------------------------------------------------------------------------------
Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS
Gross Profit as a Percentage of Sales Change Three Months Ended Nine Months Ended
December 25, 2021 December 25, 2021
Gross profit change 150 bps 150 bps
Primary drivers of change in gross profit as a
percentage of sales
Material costs 180 bps 190 bps
Distribution and occupancy costs 120 bps 160 bps
Technician labor costs (150) bps (210) bps
OSG&A Expenses
OSG&A Expenses Three Months Ended Nine Months Ended
December 25, December 26, December 25, December 26,
(thousands) 2021 2020 2021 2020
OSG&A Expenses $ 93,146 $ 80,450 $ 287,366 $ 236,603
Percentage of sales 27.3 % 28.3 % 27.9 % 28.8 %
Dollar change compared to prior year $ 12,696 $ 50,763
Percentage change compared to prior year 15.8 %
21.5 %
The increase of$12.7 million and$50.8 million in OSG&A expenses for the three months and nine months endedDecember 25, 2021 , respectively, as compared to the prior year comparable period is primarily due to increased expenses from comparable stores, mainly store management compensation and operating expenses needed to match demand. However, we gained leverage with higher overall comparable store sales, which resulted in the decrease in OSG&A expenses, as a percentage of sales, from the prior year comparable period. The increase in OSG&A expenses for the three months and nine months endedDecember 25, 2021 was also partially due to increased expenses from 51 new stores, as well as an increase in litigation settlement costs (mainly related to the Cerini matter described in Note 10 to the Company's consolidated financial statements). Partially offsetting these increases were lower expenses for the three months and nine months endedDecember 25, 2021 from eight stores closed compared to the prior year comparable period. Three Months Nine Months OSG&A Expenses Change Ended Ended December December (thousands) 25, 2021 25, 2021 OSG&A expenses change$ 12,696 $ 50,763 Drivers of change in OSG&A expenses Increase from comparable stores$ 8,261 $ 36,597 Increase from new stores$ 5,059 $ 12,942 Increase in litigation settlement costs$ 89 $ 4,009 Decrease from closed stores$ (713) $ (2,785) Other Performance Factors Net Interest Expense Net interest expense of$5.7 million for the three months endedDecember 25, 2021 decreased$1.1 million as compared to the prior year period, and decreased as a percentage of sales from 2.4 percent to 1.7 percent. Weighted average debt outstanding for the three months endedDecember 25, 2021 decreased by approximately$26 million as compared to the three months endedDecember 26, 2020 . This decrease is primarily related to a decrease in debt outstanding under our revolving credit facility (the "Credit Facility"). The weighted average interest rate decreased approximately 60 basis points from the prior year quarter due primarily to a decrease in Credit Facility borrowing rates. Net interest expense for the nine months endedDecember 25, 2021 decreased$2.6 million as compared to the same period in the prior year, and decreased from 2.6 percent to 1.8 percent as a percentage of sales for the same periods. Weighted average debt outstanding decreased by approximately$137 million and the weighted average interest rate increased by approximately 30 basis points as compared to the same period of the prior year.
Provision for Income Taxes
Our effective income tax rate for the three months and nine months ended
--------------------------------------------------------------------------------
Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 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 25, December December 25, December
(thousands) 2021 26, 2020 2021 26, 2020
Net income $ 16,287 $ 6,683 $ 52,953 $ 22,516
Store impairment charge - - - 99
Store closing costs 5 (14) (425) 2,496
Monro.Forward initiative costs 418 1,056 569 1,510
Acquisition due diligence and integration
costs 170 122 590 161
Management transition costs - 128 59 385
Litigation settlement costs (161) (250) 3,759 (250)
Provision for income taxes on adjustments (104) (234) (1,101) (1,022)
Adjusted net income $ 16,615 $ 7,491 $ 56,404 $ 25,895 Adjusted diluted EPS is summarized as follows:
Reconciliation of Adjusted Diluted EPS Three Months Ended
Nine Months Ended
December 25, December December 25, December
2021 26, 2020 2021 26, 2020
Diluted EPS $ 0.48 $ 0.20 $ 1.56 $ 0.67
Store impairment charge (a) - - - 0.00
Store closing costs (a) 0.00 (0.00) (0.01) 0.06
Monro.Forward initiative costs 0.01 0.02 0.01 0.03
Acquisition due diligence and integration
costs (a) 0.00 0.00 0.01 0.00
Management transition costs (a) - 0.00 0.00 0.01
Litigation settlement costs (a) (0.00) (0.01) 0.08 (0.01)
Adjusted diluted EPS $ 0.49 $ 0.22 $ 1.66 $ 0.77 (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 adjustments to diluted EPS reflect effective tax rates of 24.1 percent and 22.5 percent for the three months endedDecember 25, 2021 andDecember 26, 2020 , respectively, and 24.2 percent and 23.2 percent for the nine months endedDecember 25, 2021 andDecember 26, 2020 , respectively. See 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 allows us to support business operations and Monro.Forward initiatives as well as invest in attractive acquisition opportunities intended to drive long-term sustainable growth, while paying down debt and returning cash to our shareholders through our dividend program.
--------------------------------------------------------------------------------
Table of Contents
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 from time to time determine that it is in our
best interests to voluntarily repay certain indebtedness early.
Accordingly, we believe that our current sources of funds will provide us with
adequate liquidity during the 12-month period following December 25, 2021 , as
well as in the long-term.
See the sections below for more details regarding material requirements for cash in our business and our sources of liquidity to meet such needs.
Material Cash Requirements
We currently expect our capital expenditures to support our projects, including upgrading our facilities and systems as well as funding our Monro.Forward initiatives, to be$30 million to$40 million in the aggregate in 2022. Additionally, we have contractual finance lease and operating lease commitments with landlords throughOctober 2040 for$604.3 million in lease payments, of which$98.7 million is due within one year. For details regarding these lease commitments, see Note 10 to the Company's consolidated financial statements.
As of
We paid cash dividends totaling
Note 7 to the Company's consolidated financial statements.
Sources and Conditions of Liquidity
Our sources to fund our material cash requirements are predominantly cash from operations, cash and equivalents on hand, and availability under our Credit Facility.
As of
© Edgar Online, source
