Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 23, 2023
OR
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number: 0-19357
Monro, Inc.
(Exact name of registrant as specified in its charter)
New York
16-0838627
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
200 Holleder Parkway, Rochester, New York
14615
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (585) 647-6400
_________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
MNRO
The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of January 19, 2024, 29,902,141 shares of the registrant's common stock, $0.01 par value per share, were outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
3
Consolidated Statements of Income and Comprehensive Income
4
Consolidated Statements of Changes in Shareholders’ Equity
5
Consolidated Statements of Cash Flows
6
Notes to Consolidated Financial Statements
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
23
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
25
Signatures
26
CONSOLIDATED FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
(thousands, except footnotes) (unaudited)
December 23, 2023
March 25, 2023
Assets
Current assets
Cash and equivalents
$
23,846
4,884
Accounts receivable
14,434
13,294
Federal and state income taxes receivable
808
—
Inventories
160,360
147,397
Other current assets
72,246
92,892
Total current assets
271,694
258,467
Property and equipment, net
284,563
304,989
Finance lease and financing obligation assets, net
189,774
217,174
Operating lease assets, net
205,244
211,101
Goodwill
736,435
736,457
Intangible assets, net
14,087
16,562
Assets held for sale
5,883
Other non-current assets
24,971
29,365
Long-term deferred income tax assets
446
2,762
Total assets
1,733,097
1,776,877
Liabilities and shareholders' equity
Current liabilities
Current portion of finance leases and financing obligations
38,858
39,982
Current portion of operating lease liabilities
38,953
37,520
Accounts payable
287,330
261,724
Federal and state income taxes payable
541
Accrued payroll, payroll taxes and other payroll benefits
19,805
15,951
Accrued insurance
53,601
47,741
Deferred revenue
15,427
15,422
Other current liabilities
32,658
30,296
Total current liabilities
486,632
449,177
Long-term debt
94,000
105,000
Long-term finance leases and financing obligations
259,794
295,281
Long-term operating lease liabilities
184,777
191,107
Other long-term liabilities
10,168
10,721
Long-term deferred income tax liabilities
37,799
30,460
Long-term income taxes payable
209
Total liabilities
1,073,379
1,081,955
Commitments and contingencies - Note 9
Shareholders' equity:
Class C Convertible Preferred stock
29
Common stock
400
Treasury stock
(250,115)
(205,648)
Additional paid-in capital
252,801
250,702
Accumulated other comprehensive loss
(3,834)
(4,115)
Retained earnings
660,437
653,554
Total shareholders' equity
659,718
694,922
Total liabilities and shareholders' equity
Class C Convertible Preferred stock Authorized 150,000 shares, $1.50 par value, one preferred stock share to 61.275 common stock shares and one preferred stock share to 23.389 common stock shares conversion value as of December 23, 2023 and March 25, 2023, respectively; 19,664 shares issued and outstanding
Common stock Authorized 65,000,000 shares, $0.01 par value; 40,006,829 shares issued as of December 23, 2023 and 39,966,401 shares issued as of March 25, 2023
Treasury stock 10,104,688 and 8,561,121 shares as of December 23, 2023 and March 25, 2023, respectively, at cost
See accompanying Notes to Consolidated Financial Statements.
Three Months Ended
Nine Months Ended
(thousands, except per share data) (unaudited)
December 24, 2022
Sales
317,653
335,193
966,712
1,014,546
Cost of sales, including distribution and occupancy costs
204,976
221,742
624,666
662,171
Gross profit
112,677
113,451
342,046
352,375
Operating, selling, general and administrative expenses
91,294
89,605
280,959
278,802
Operating income
21,383
61,087
73,573
Interest expense, net of interest income
5,043
5,949
15,052
17,312
Other income, net
(62)
(98)
(153)
(275)
Income before income taxes
16,402
17,995
46,188
56,536
Provision for income taxes
4,232
4,961
12,317
17,897
Net income
12,170
13,034
33,871
38,639
Other comprehensive income (loss)
Changes in pension, net of tax
94
281
(296)
Comprehensive income
12,264
12,936
34,152
38,343
Earnings per share
Basic
0.38
0.41
1.06
1.18
Diluted
1.05
1.17
Weighted average common shares outstanding
30,934
31,470
31,263
32,386
32,188
31,985
32,142
32,890
Class C
Accumulated
Convertible
Additional
Other
Preferred Stock
Common Stock
Treasury Stock
Paid-In
Comprehensive
Retained
Total
(thousands) (unaudited)
Shares
Amount
Capital
Loss
Earnings
Equity
Balance at September 24, 2022
20
39,957
7,977
(179,944)
247,907
(4,692)
658,070
721,770
Other comprehensive loss
Pension liability adjustment
Dividends declared
Preferred
(129)
Common
(8,791)
Dividend payable
(64)
Repurchase of stock
584
(25,704)
Stock options and restricted stock
10
Stock-based compensation
1,155
Balance at December 24, 2022
8,561
249,072
(4,790)
662,120
701,183
Balance at September 23, 2023
40,006
252,212
(3,928)
657,078
700,143
Other comprehensive income
(337)
(8,392)
(82)
Repurchase of stock (a)
1,544
(44,467)
1
589
Balance at December 23, 2023
40,007
10,105
Balance at March 26, 2022
39,907
399
6,360
(108,729)
244,577
(4,494)
651,124
782,906
(386)
(27,096)
(161)
2,201
(96,919)
50
296
297
4,199
Balance at March 25, 2023
39,966
(804)
(25,992)
(192)
41
(414)
2,513
(a) Inclusive of excise tax of $0.4 million for the three months and nine months ended December 23, 2023. The excise tax is assessed at one percent of the fair value of net stock repurchases after December 31, 2022.
We declared $0.28 dividends per common share or equivalent for the three months ended December 23, 2023 and the three months ended December 24, 2022, and $0.84 per common share or equivalent for the nine months ended December 23, 2023 and the nine months ended December 24, 2022.
Operating activities
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization
54,437
58,201
Share-based compensation expense
Gain on disposal of assets
(1,579)
(2,748)
Gain on divestiture
(2,394)
Deferred income tax expense
9,557
3,306
Change in operating assets and liabilities (excluding acquisitions and divestitures)
(1,140)
(2,360)
(12,709)
(12,319)
6,388
(18,156)
30,837
27,732
25,606
96,366
Accrued expenses
12,984
5,323
(1,349)
2,269
(28,953)
(26,979)
112
Cash provided by operating activities
130,463
171,191
Investing activities
Capital expenditures
(18,892)
(28,535)
Acquisitions, net of cash acquired
(954)
Proceeds from divestiture
56,586
Deferred proceeds received from divestiture
15,839
4,294
Proceeds from the disposal of assets
2,793
4,416
(25)
(256)
Cash (used for) provided by investing activities
(285)
35,551
Financing activities
Proceeds from borrowings
99,103
139,176
Principal payments on long-term debt, finance leases and financing obligations
(139,496)
(215,439)
(44,044)
Exercise of stock options
17
Dividends paid
(26,796)
(27,482)
Deferred financing costs
(1,027)
Cash used for financing activities
(111,216)
(201,691)
Increase in cash and equivalents
18,962
5,051
Cash and equivalents at beginning of period
7,948
Cash and equivalents at end of period
12,999
Supplemental information
Leased assets reduced in exchange for reduced finance lease liabilities
(4,539)
(10,436)
Leased assets obtained in exchange for new operating lease liabilities
21,577
25,963
INDEX TO NOTES
Notes to Consolidated Financial Statements (unaudited)
Note 1 Description of Business and Basis of Presentation
Note 2 Acquisitions and Divestitures
9
Note 3 Earnings per Common Share
Note 4 Income Taxes
Note 5 Fair Value
Note 6 Cash Dividend
Note 7 Revenues
11
Note 8 Long-term Debt
Note 9 Commitments and Contingencies
12
Note 10 Supplier Finance Program
Note 11 Share Repurchase
13
Note 12 Equity Capital Structure Reclassification
NOTES
Note 1 – Description of Business and Basis of Presentation
Description of business
Monro, Inc. and its direct and indirect subsidiaries (together, “Monro”, the “Company”, “we”, “us”, or “our”), are engaged principally in providing automotive undercar repair and tire replacement sales and tire related services in the United States. Monro had 1,296 Company-operated retail stores located in 32 states and 51 franchised locations as of December 23, 2023.
A certain number of our retail locations also service commercial customers. Our locations that serve commercial customers generally operate consistently with our other retail locations, except that the sales mix for these locations includes a higher number of commercial tires.
Monro’s operations are organized and managed as one single segment designed to offer to our customers replacement tires and tire related services, automotive undercar repair services as well as a broad range of routine maintenance services, primarily on passenger cars, light trucks and vans. We also provide other products and services for brakes; mufflers and exhaust systems; and steering, drive train, suspension and wheel alignment.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. While these statements reflect all adjustments (consisting of items of a normal recurring nature) that are, in the opinion of management, necessary for a fair statement of the results of the interim period, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“GAAP”) for complete financial statement presentation. The consolidated financial statements should be read in conjunction with the financial statement disclosures in our Form 10-K for the fiscal year ended March 25, 2023.
We use the same significant accounting policies in preparing quarterly and annual financial statements. For a description of our significant accounting policies followed in the preparation of the financial statements, see Note 1 of our Form 10-K for the fiscal year ended March 25, 2023.
Due to the seasonal nature of our business, quarterly operating results and cash flows are not necessarily indicative of the results that may be expected for other interim periods or the full year.
Fiscal year
We operate on a 52/53 week fiscal year ending on the last Saturday in March. Fiscal year 2024 covers 53 weeks and fiscal year 2023 covers 52 weeks. Unless specifically indicated otherwise, any references to “2024” or “fiscal 2024” and “2023” or “fiscal 2023” relate to the years ending March 30, 2024 and March 25, 2023, respectively.
Recent accounting pronouncements
In September 2022, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance which requires certain disclosure for supplier finance programs used in connection with the purchase of goods and services. We adopted this guidance during the first quarter of fiscal 2024, other than the roll forward information disclosure which we expect to adopt during the first quarter of the fiscal year ending March 29, 2025. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In October 2021, the FASB issued new accounting guidance which requires an acquiring entity to recognize and measure contract assets and contract liabilities acquired in a business combination as if they entered into the original contract at the same time and same date as the acquiree. We adopted this guidance during the first quarter of fiscal 2024. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In November 2023, the FASB issued new accounting guidance which requires expanding disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. This guidance is effective for fiscal years beginning after December 15, 2023, and for interim periods within those years beginning after December 15, 2024. Early application permitted. We are currently evaluating the impact of adopting this guidance.
In December 2023, the FASB issued new accounting guidance which requires income tax disclosure updates, primarily by requiring specific categories and greater disaggregation within the rate reconciliation and disaggregation of income taxes paid by jurisdiction. This guidance is effective for fiscal years periods beginning after December 15, 2024. Early application permitted. We are currently evaluating the impact of adopting this guidance.
Other recent authoritative guidance issued by the FASB (including technical corrections to the Accounting Standards Codification (“ASC”)) and the SEC did not or are not expected to have a material effect on our consolidated financial statements.
Property and equipment, net: Property and equipment balances are shown on the Consolidated Balance Sheets net of accumulated depreciation of $440.6 million and $426.7 million as of December 23, 2023 and March 25, 2023, respectively.
We classify long-lived assets to be sold as held for sale in the period in which all of the required criteria are met. We initially measure a long-lived asset that is classified as held for sale at the lower of its carrying value or fair value less any costs to sell. Any loss resulting from this measurement is recognized in the period in which the held-for-sale criteria are met. Conversely, gains are not recognized on the sale of a long-lived asset until the date of sale. Upon determining that a long-lived asset meets the criteria to be classified as held for sale, we cease depreciation and report long-lived assets, if material, as Assets held for sale in our Consolidated Balance Sheets.
On June 1, 2023, we announced the planned sale of our corporate headquarters at 200 Holleder Parkway in Rochester, New York and our plan to relocate our corporate headquarters to another location in the greater Rochester area. We determined that the related assets met the criteria to be classified as held for sale as of December 23, 2023.
Note 2 – Acquisitions and Divestitures
Acquisitions
Monro’s acquisitions are strategic moves in our plan to fill in and expand our presence in our existing and contiguous markets, expand into new markets and leverage fixed operating costs such as distribution, advertising, and administration.
During 2023, we acquired six retail tire and automotive repair stores. We accounted for the 2023 acquisitions as business combinations using the acquisition method of accounting in accordance with the FASB ASC Topic 805, “Business Combinations.” See Note 2 of our Form 10-K for the fiscal year ended March 25, 2023 for additional information.
We refined the valuation data and estimates primarily related to inventory, warranty reserves, intangible assets, real property leases, and certain liabilities for the 2023 acquisitions and completed the valuations prior to the first anniversary date of the acquisitions. Any adjustments were made to the fair values of identifiable assets acquired and liabilities assumed. Such amounts are immaterial to our consolidated financial statements.
Divestiture
On June 17, 2022, we completed the divestiture of assets relating to our wholesale tire operations (seven locations) and internal tire distribution operations to American Tire Distributors, Inc. (“ATD”). We received $62 million from ATD at the closing of the transaction, of which $5 million was held in escrow and subsequently paid in December 2023. The remaining $40 million (“Earnout”) of the total consideration of $102 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 with ATD. We received $11.1 million of the Earnout during the first nine months of fiscal 2024, $8.7 million of the Earnout during fiscal 2023 and $20.2 million of the Earnout is outstanding as of December 23, 2023. Under a distribution agreement between us and ATD, ATD agreed to supply and sell tires to retail locations we own. After ATD satisfies the Earnout payments, our company-owned retail stores will be required to purchase at least 90 percent of their forecasted requirements for certain passenger car tires, light truck replacement tires, and medium truck tires from or through ATD. Any tires that ATD is unable to supply or fulfill from those categories will be excluded from the calculation of our requirements for tires. The initial term of the distribution agreement is five years after the completion of the Earnout Period, with automatic 12-month renewal periods thereafter. The divestiture enables us to focus our resources on our core retail business operations. The divestiture did not meet the criteria to be reported as discontinued operations in our consolidated financial statements as our decision to divest this business did not represent a strategic shift that would have a major effect on our operations and financial results.
In connection with this transaction, we recognized a pre-tax gain of $2.4 million within OSG&A expenses, as finalized in June 2022. We also expensed $0.4 million of closing costs and costs associated with the closing of a related warehouse within OSG&A expenses, as finalized in September 2022. We finalized the impact of these associated closing costs and the subsequent gain on the sale of related warehouses of $2.3 million during the remainder of fiscal 2023, in addition to a subsequent final inventory adjustment of $0.3 million of expense in November 2023. Additionally, in August 2022 we incurred $1.3 million in costs in connection with restructuring and elimination of certain executive management positions upon completion of the divestiture.
See Note 2 of our Form 10-K for the fiscal year ended March 25, 2023 for additional information. For additional information regarding discrete tax impacts because of the divestiture, see Note 4.
Note 3 – Earnings per Common Share
Basic earnings per common share amounts are calculated by dividing income available to common shareholders, after deducting preferred stock dividends, by the weighted average number of shares of common stock outstanding. Diluted earnings per common share amounts are calculated by dividing net income by the weighted average number of shares of common stock outstanding adjusted to give effect to potentially dilutive securities.
Earnings per Common Share
(thousands, except per share data)
Numerator for earnings per common share calculation:
Less: Preferred stock dividends
Income available to common shareholders
11,833
12,905
33,067
38,253
Denominator for earnings per common share calculation:
Weighted average common shares - basic
Effect of dilutive securities:
Preferred stock
1,205
460
815
Restricted stock
49
55
64
44
Weighted average common shares - diluted
Basic earnings per common share
Diluted earnings per common share
Weighted average common share equivalents that have an anti-dilutive impact are excluded from the computation of diluted earnings per share.
Note 4 – Income Taxes
For the three months and nine months ended December 23, 2023, our effective income tax rate was 25.8 percent and 26.7 percent, respectively, compared to 27.6 percent and 31.7 percent for the three months and nine months ended December 24, 2022, respectively. The difference from the statutory rate is due to state taxes and the discrete tax impact related to share-based awards. Our effective income tax rate for the three months and nine months ended December 23, 2023 was higher by 0.3 percent and 0.8 percent, respectively, and was higher by 0.9 percent and 0.7 percent for the three months and nine months ended December 24, 2022, respectively, due to the discrete tax impact related to share-based awards. Our effective income tax rate for the nine months ended December 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 various U.S. state jurisdictions because of the divestiture.
Note 5 – Fair Value
Long-term debt had a carrying amount that approximates a fair value of $94.0 million as of December 23, 2023, as compared to a carrying amount and a fair value of $105.0 million as of March 25, 2023. The carrying value of our debt approximated its fair value due to the variable interest nature of the debt.
Note 6 – Cash Dividend
We paid dividends of $26.8 million during the nine months ended December 23, 2023. The declaration of future dividends will be at the discretion of the Board of Directors and will depend on our financial condition, results of operations, capital requirements, compliance with charter and contractual restrictions, and such other factors as the Board of Directors deems relevant. Under our Credit Facility, there are no restrictions on our ability to declare dividends as long as we are in compliance with the covenants in the Credit
Facility. For additional information regarding our Credit Facility, see Note 8.
Note 7 – Revenues
Automotive undercar repair, tire replacement sales and tire related services represent the vast majority of our revenues. We also earn revenue from the sale of tire road hazard warranty agreements as well as commissions earned from the delivery of tires on behalf of certain tire vendors and franchise royalties.
Revenue from automotive undercar repair, tire replacement sales and tire related services is recognized at the time the customers take possession of their vehicle or merchandise. For sales to certain customers that are financed through the offering of credit on account, payment terms are established for customers based on our pre-established credit requirements. Payment terms may vary depending on the customer and generally are 30 days. Based on the nature of receivables, no significant financing components exist. Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. We estimate the reduction to sales and cost of sales for returns based on current sales levels and our historical return experience. Such amounts are immaterial to our consolidated financial statements.
Revenues
(thousands)
Tires (a)
161,116
176,532
467,069
507,501
Maintenance
84,179
86,217
267,325
267,131
Brakes
39,824
41,396
133,663
137,613
Steering
24,490
25,379
78,851
82,973
Exhaust
5,031
5,006
15,386
17,202
Franchise royalties
3,013
663
4,418
2,126
(a) Includes the sale of tire road hazard warranty agreements and tire delivery commissions.
Revenue from the sale of tire road hazard warranty agreements is initially deferred and is recognized over the contract period as costs are expected to be incurred in performing such services, typically 21 to 36 months. The deferred revenue balances at December 23, 2023 and March 25, 2023 were $22.1 million and $22.4 million, respectively, of which $15.4 million and $15.4 million, respectively, are reported in Deferred revenue and $6.7 million and $7.0 million, respectively, are reported in Other long-term liabilities in our Consolidated Balance Sheets.
Changes in Deferred Revenue
22,354
Deferral of revenue
16,480
Recognition of revenue
(16,722)
22,112
As of December 23, 2023, we expect to recognize $5.1 million of deferred revenue related to road hazard warranty agreements in the remainder of fiscal 2024, $12.4 million of deferred revenue during our fiscal year ending March 29, 2025, and $4.6 million of deferred revenue thereafter.
Under various arrangements, we receive from certain tire vendors a delivery commission and reimbursement for the cost of the tire that we may deliver to customers on behalf of the tire vendor. The commission we earn from these transactions is as an agent and the net amount retained is recorded as sales.
Note 8 – Long-term Debt
Credit Facility
In April 2019, we entered into a five-year $600 million revolving credit facility agreement with eight banks (the “Credit Facility”) that includes an accordion feature permitting us to request an increase in availability of up to an additional $250 million. See Note 6 of our Form 10-K for the fiscal year ended March 25, 2023 for additional information.
On November 10, 2022, we entered into a Third Amendment to the Credit Facility (the “Third Amendment”). The Third Amendment, among other things, extended the term of the Credit Facility to November 10, 2027 and amended certain of the financial terms in the Credit Agreement, as amended by the Second Amendment.
The Third Amendment amended the interest rate charged on borrowings to be based on 0.10 percent over the Secured Overnight Financing Rate (“SOFR”), replacing the previously used LIBOR. In addition, one additional bank was added to the bank syndicate for a total of nine banks now within the syndicate. Except as amended by the First Amendment, Second Amendment and Third Amendment, the remaining terms of the credit agreement remain in full force and effect.
Within the Credit Facility, we have a sub-facility of $80 million available for the purpose of issuing standby letters of credit. The sub-facility requires fees aggregating 87.5 to 212.5 basis points annually of the face amount of each standby letter of credit, payable quarterly in arrears. There was a $30.1 million outstanding letter of credit at December 23, 2023.
We are required to maintain an interest coverage ratio, as defined in the Credit Facility, of at least 1.55 to 1. In addition, our ratio of adjusted debt to EBITDAR, as defined in the Credit Facility, cannot exceed 4.75 to 1, subject to certain exceptions under the Credit Facility.
We were in compliance with all debt covenants at December 23, 2023.
There was $94.0 million outstanding and $475.9 million available under the Credit Facility at December 23, 2023.
Note 9 – Commitments and Contingencies
Commitments
Commitments Due by Period
Within
2 to
4 to
After
1 Year
3 Years
5 Years
Principal payments on long-term debt
Finance lease commitments/financing obligations (a)
365,192
51,045
94,171
79,883
140,093
Operating lease commitments (a)
259,079
46,356
82,249
59,096
71,378
718,271
97,401
176,420
232,979
211,471
(a)Finance and operating lease commitments represent future undiscounted lease payments and include $78.6 million and $51.4 million, respectively, related to options to extend lease terms that are reasonably certain of being exercised.
Contingencies
We are currently a party to various claims and legal proceedings incidental to the conduct of our business. If management believes that a loss arising from any of these matters is probable and can reasonably be estimated, we will record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Litigation is subject to inherent uncertainties, and unfavorable rulings could occur and may include monetary damages. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the financial position and results of operations of the period in which any such ruling occurs, or in future periods.
Note 10 – Supplier Finance Program
We facilitate a voluntary supply chain financing program to provide our suppliers with the opportunity to sell receivables due from us (our accounts payable) to a participating financial institution at the sole discretion of both the supplier and the financial institution. Should a supplier choose to participate in the program, it may receive payment from the financial institution in advance of agreed payment terms; our responsibility is limited to making payments to the respective financial institution on the terms originally negotiated with our supplier, which are generally for a term of 360 days. We have concluded that the program is a trade payable program and not indicative of a borrowing arrangement.
Our outstanding supplier obligations eligible for advance payment under the program totaled $168.4 million, $167.3 million, and $133.9 million as of December 23, 2023, March 25, 2023, and December 24, 2022, respectively, and are included within Accounts Payable on our Consolidated Balance Sheets. Our outstanding supplier obligations do not represent actual receivables sold by our suppliers to the financial institutions, which may be lower.
Note 11 – Share Repurchase
We periodically repurchase shares of our common stock under a board-authorized repurchase program through open market transactions. The share repurchase activity below does not include excise tax of $0.4 million during the three and nine months ended December 23, 2023. The excise tax is assessed at one percent of the fair market value of net stock repurchases after December 31, 2022.
Share Repurchase Activity
Number of shares purchased
1,543.6
583.8
2,201.3
Average price paid per share
28.50
44.00
Total repurchased
43,997
25,687
96,853
Note 12 – Equity Capital Structure Reclassification
On May 12, 2023, we entered into a reclassification agreement (the “Reclassification Agreement”) with the holders (the “Class C Holders”) of our Class C Convertible Preferred Stock (the “Class C Preferred Stock”) to reclassify our equity capital structure to eliminate the Class C Preferred Stock.
Under the Reclassification Agreement, after receiving shareholder approval on August 15, 2023, we filed amendments to our certificate of incorporation (the “Certificate of Incorporation”) to create a mandatory conversion of any outstanding shares of Class C Preferred Stock prior to an agreed sunset date of the earliest of (i) August 15, 2026; (ii) the first business day immediately prior to the record date established for the determination of the shareholders of the Company entitled to vote at the Company’s 2026 annual meeting of shareholders; and (iii) the date on which the Class C Holders, in the aggregate, cease to beneficially own at least 50% of all shares of the Class C Preferred Stock issued and outstanding as of May 12, 2023. In exchange for this sunset of the Class C Preferred Stock, the conversion rate of Class C Preferred Stock was adjusted so that each share of Class C Preferred Stock will convert into 61.275 shares of common stock (the “adjusted conversion rate”), an increase from the prior conversion rate of 23.389 shares of common stock for each share of Class C Preferred Stock under the Certificate of Incorporation. At the end of the sunset period, all shares of Class C Preferred Stock remaining outstanding will be automatically converted into shares of common stock at the adjusted conversion rate. In addition, the liquidation preference for the Class C Preferred Stock was amended to provide that, upon a liquidation event, each holder of Class C Preferred Stock would be entitled to receive, for each share of Class C Preferred Stock held by the holder upon a liquidation, dissolution, or winding up of the affairs of the Company, an amount equal to the greater of $1.50 per share and the amount the holder would have received had each share of Class C Preferred Stock been converted to shares of common stock immediately prior to the liquidation, dissolution, or winding up. There was no Class C Preferred Stock converted during the three months ended December 23, 2023. The Reclassification Agreement also provides that, during the sunset period, the Class C Holders will have the right to appoint one member of the Board of Directors. This designee is expected to be Peter J. Solomon, who is one of the Company’s current directors and one of the Class C Holders.
Additionally, on August 15, 2023, our shareholders voted to approve an amendment to our Certificate of Incorporation to declassify the Board of Directors. Under this amendment, the class of directors standing for election at our 2024 annual meeting of shareholders will stand for election for one-year terms expiring at the 2025 annual meeting of shareholders. Starting with the 2025 annual meeting of shareholders, the Board of Directors will no longer be classified, and all the directors elected at that meeting (and each meeting thereafter) will be elected for a term expiring at the next annual meeting of shareholders.
We have determined the amendments to the Class C Preferred Stock, because of the Reclassification Agreement, should be accounted for as a modification.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Recent Developments
There were no recent developments during the quarter ended December 23, 2023 that materially affected, or are reasonably likely to materially affect, our financial reporting.
Economic Conditions
The United States economy experienced higher inflation during fiscal 2023 and fiscal 2024 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. The U.S. Federal Reserve Board also increased interest rates during fiscal 2023 and into fiscal 2024. 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, changing interest rates, and geopolitical uncertainty, will result in an economic slowdown or recession in the 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.
Financial Summary
Third quarter 2024 included the following notable items:
Diluted earnings per common share (“EPS”) were $0.38.
Adjusted diluted EPS, a non-GAAP measure, were $0.39.
Sales decreased 5.2 percent, due to lower overall comparable store sales resulting from lower store traffic.
Comparable store sales decreased 6.1 percent, driven primarily by lower tire unit sales.
Operating income of $21.4 million was 10.3 percent lower than the comparable prior-year period.
Net income was $12.2 million.
Adjusted net income, a non-GAAP measure, was $12.5 million.
Earnings Per Common Share
Change
Diluted EPS
(7.3)
%
(10.3)
Adjustments
0.01
0.02
0.05
0.10
Adjusted diluted EPS
0.39
0.43
(9.3)
1.11
1.27
(12.6)
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 with 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 costs related to shareholder matters from our equity capital structure recapitalization, transition costs related to back-office optimization, corporate headquarters relocation costs, and items related to store closings, as well as acquisition initiatives. Reconciliations of these non-GAAP financial measures to GAAP measures are provided beginning on page 18 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.
Analysis of Results of Operations
Summary of Operating Income
(5.2)
(4.7)
(7.6)
(5.7)
(0.7)
(2.9)
1.9
0.8
(17.0)
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 ended December 23, 2023 and in the three months ended December 24, 2022, and 271 selling days in the nine months ended December 23, 2023 and in the nine months ended December 24, 2022.
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.
Dollar change compared to prior year
(17,540)
(47,834)
Percentage change compared to prior year
The sales decrease was due to a decrease in comparable store sales, including a comparable store sales decrease in approximately 300 of our small or underperforming stores, resulting from lower store traffic due to milder weather as well as a pressured low-to-middle income consumer that continued to defer purchases in the Company’s high-ticket tire category, and a decrease in sales from closed stores. The decrease in sales from closed stores during the nine months ended December 23, 2023 from the prior year comparable period was primarily driven by the sale of our wholesale tire locations of approximately $23.9 million. These decreases were partially offset by an increase in sales from new stores and franchise royalties. The following table shows the primary drivers of the change in sales for each of the three months and nine months ended December 23, 2023, as compared to the same periods ended December 24, 2022.
Sales Percentage Change
Sales change
Primary drivers of change in sales
Comparable store sales
(6.1)
(2.7)
Closed store sales (a)
(0.1)
(2.6)
New store sales (b)
0.3
0.4
0.7
0.2
(a)The change in closed stores for the nine months ended December 23, 2023 is primarily due to sales from the wholesale locations sold to American Tire Distributors (“ATD”).
(b)Sales from the fiscal 2023 acquisitions primarily represent the change.
Broad-based inflationary pressures impacting consumers partly led to lower demand in tires and our higher margin service categories during the three months and nine months ended December 23, 2023. We expect the inflationary environment to continue to impact our customers throughout the remainder of fiscal 2024.
Comparable Store Product Category Sales Change (a)
Tires
(9)
(4)
Maintenance service
(3)
7
(0)
(1)
(5)
(2)
Alignment
Front end/shocks
(6)
(a)The comparable store product category sales change for the three months and nine months ended December 24, 2022 are adjusted for selling days.
Sales by Product Category
51
53
27
28
Steering (a)
2
100
(a)Steering product category includes front end/shocks and alignment product category sales.
Change in Number of Company-Operated Retail Stores
Beginning store count
1,298
1,297
1,299
1,304
Opened
Closed
(12)
Ending store count
1,296
Cost of Sales and Gross Profit
Gross Profit
Percentage of sales
35.5
33.8
35.4
34.7
(774)
(10,329)
Gross profit, as a percentage of sales, increased 170 basis points for the three months ended December 23, 2023, as compared to the prior year comparable period. Retail material costs, as a percentage of sales, decreased due primarily to tire mix improvement and opportunistic pricing actions. Technician labor costs, as a percentage of sales, decreased due primarily to reduced labor hours as we have optimized staffing levels. Partially offsetting these cost decreases was an increase in retail distribution and occupancy costs, as a percentage of sales, as we lost leverage on these largely fixed costs with lower overall comparable store sales.
Gross profit, as a percentage of sales, increased 70 basis points for the nine months ended December 23, 2023, as compared to the prior year comparable period. Retail material costs, as a percentage of sales, decreased due primarily to tire mix improvement and opportunistic pricing actions, in addition to the impact from the sale of our wholesale operations to ATD during June 2022. Partially offsetting this increase in gross profit, as a percentage of sales, were increased technician labor costs, as a percentage of sales, due to the impact from wage inflation, as well as an increase in retail distribution and occupancy costs, as a percentage of sales, as we lost leverage on these largely fixed costs with lower overall comparable store sales.
Gross Profit as a Percentage of Sales Change
Gross profit change
170
bps
70
Primary drivers of change in gross profit as a percentage of sales
Retail material costs
190
150
Technician labor costs
40
(60)
Retail distribution and occupancy costs
(30)
Impact from the sale of wholesale operations
OSG&A Expenses
28.7
26.7
29.1
27.5
1,689
2,157
The increase of $1.7 million and $2.2 million in OSG&A expenses for the three months and nine months ended December 23, 2023, respectively, from the comparable prior year period is primarily due to an increase in OSG&A expenses from comparable and new stores, transition costs related to back-office optimization, corporate headquarters relocation costs, as well as the gain on the sale to ATD of our wholesale tire locations and distribution assets, net of closing costs and costs associated with the closing of a related warehouse and inventory adjustments during the comparable prior period. Partially offsetting these increases were decreases in costs related to closed stores, a decrease from litigation reserve/settlement costs and, in the three months ended December 23, 2023, a decrease in costs related to shareholder matters from our equity capital structure recapitalization. However, for the nine months ended December 23, 2023, there was an increase in costs related to shareholder matters from our equity capital structure recapitalization. Additionally, there was a decrease in executive management restructuring costs incurred during the comparable prior period for the nine months ended December 23, 2023. The following table shows the impact of these costs on the change in OSG&A expenses for each of the three months and nine months ended December 23, 2023, as compared to the same periods ended December 24, 2022.
OSG&A Expenses Change
OSG&A expenses change
Drivers of change in OSG&A expenses
Decrease from closed stores
(547)
(2,642)
Decrease in management restructuring costs
(1,338)
Decrease from litigation reserve/settlement costs
(450)
Increase from net gain on sale of wholesale tire locations and distribution assets, net
304
2,272
Increase from new stores
332
969
(Decrease) increase from costs related to shareholder matters
(156)
802
Increase from transition costs related to back-office optimization
58
699
Increase from corporate headquarters relocation costs
95
155
Increase from comparable stores
2,053
1,690
Other Performance Factors
Net Interest Expense
Net interest expense of $5.0 million for the three months ended December 23, 2023 decreased $0.9 million as compared to the prior year period, and decreased as a percentage of sales from 1.8 percent to 1.6 percent. Weighted average debt outstanding for the three months ended December 23, 2023 decreased by approximately $104 million as compared to the three months ended December 24, 2022. This decrease is primarily related to a decrease in debt outstanding under the Credit Facility. The weighted average interest rate increased approximately 60 basis points from the prior year comparable quarter due to an increase in the Credit Facility’s floating borrowing rates.
Net interest expense of $15.1 million for the nine months ended December 23, 2023 decreased $2.3 million as compared to the prior year period, and decreased as a percentage of sales from 1.7 percent to 1.6 percent. Weighted average debt outstanding for the nine months ended December 23, 2023 decreased by approximately $121 million and the weighted average interest rate increased approximately 80 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 December 23, 2023 was 25.8 percent and 26.7 percent, respectively, compared with 27.6 percent and 31.7 percent in the comparable prior-year periods. Our effective income tax rate for the three months and nine months ended December 23, 2023 was higher by 0.3 percent and 0.8 percent, respectively, and was higher by 0.9 percent and 0.7 percent for the three months and nine months ended December 24, 2022, respectively, due to the discrete tax impact related to share-based awards. Our effective income tax rate for the nine months ended December 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 various U.S. state jurisdictions because of 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 costs related to shareholder matters from our equity capital structure recapitalization, transition costs related to back-office optimization, corporate headquarters relocation costs, and items related to store closings, as well as 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
Net loss (gain) on sale of wholesale tire and distribution assets (a)
(1,968)
Store closing costs
(26)
232
Monro.Forward initiative costs
68
110
Acquisition due diligence and integration costs
Litigation reserve/settlement costs
450
Management restructuring/transition costs (b)
1,338
Costs related to shareholder matters
80
236
1,355
553
Transition costs related to back-office optimization
Corporate headquarters relocation costs
Provision for income taxes on pre-tax adjustments
(131)
(191)
(637)
(178)
Certain discrete tax items (c)
2,644
Adjusted net income
12,546
13,603
35,726
41,811
(a)Amounts include a loss on subsequent inventory adjustments and gain on sale of a related warehouse, net of associated closing costs.
(b)Costs incurred in connection with restructuring and elimination of certain executive management positions upon completion of our sale of wholesale tire locations and distribution assets.
(c)Certain discrete tax items related to the sale of our wholesale tire locations and distribution assets as well as the revaluation of deferred tax balances due to changes in the mix of pre-tax income in various U.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.
Adjusted diluted EPS is summarized as follows:
Reconciliation of Adjusted Diluted EPS
Net loss (gain) on sale of wholesale tire and distribution assets
(0.05)
Store closing costs (a)
(0.00)
0.00
Monro.Forward initiative costs (a)
Acquisition due diligence and integration costs (a)
Management restructuring/transition costs
0.03
Transition costs related to back-office optimization (a)
Corporate headquarters relocation costs (a)
Certain discrete tax items
0.08
(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 +/- $0.01 due to rounding.
The certain discrete tax items for the nine months ended December 24, 2022 are tax affected. The other adjustments to diluted EPS reflect estimated annual effective income tax rates of 25.8 percent and 25.1 percent for the three months ended December 23, 2023 and December 24, 2022, respectively, and 25.6 percent and 25.1 percent for the nine months ended December 23, 2023 and December 24, 2022, respectively. These estimated annual effective income tax rates exclude the income tax impacts from share-based compensation and for the nine months ended December 24, 2022 exclude certain discrete tax items. 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 each of 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.
Future Cash Requirements
We currently expect our capital expenditures to support our projects, including upgrading our facilities and systems, to be $30 million to $35 million in the aggregate in fiscal 2024. Additionally, we have contractual finance lease and operating lease commitments with landlords through October 2040 for $494.3 million in lease payments, of which $96.7 million is due within one year. For details regarding these lease commitments, see Note 9 to our consolidated financial statements.
As of December 23, 2023, we had $94.0 million outstanding under the Credit Facility, none of which is due in the succeeding 12 months. For details regarding our indebtedness that is due, see Note 8 to our consolidated financial statements.
Dividends
We paid cash dividends of $0.28 per share totaling $8.7 million and $8.9 million for the three months ended December 23, 2023 and December 24, 2022, respectively, and $0.84 per share totaling $26.8 million and $27.5 million for the nine months ended December 23, 2023 and December 24, 2022, respectively. We have paid dividends quarterly since fiscal 2006 and it is our intent to continue to do so in the future.
Share Repurchases
We returned $44.5 million to shareholders through share repurchases during the nine months ended December 23, 2023. This amount is inclusive of excise tax of $0.4 million for the nine months ended December 23, 2023. The excise tax is assessed at one percent of the fair market value of net stock repurchases after December 31, 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 11 to our consolidated financial statements.
Working Capital Management
As of December 23, 2023, we had a working capital deficit of $214.9 million, an increase of $24.2 million from a deficit of $190.7 million as of March 25, 2023. The increase was primarily driven by an increase in accounts payable as a result of certain suppliers that participate in our supply chain finance program. We have agreed to contractual payment terms and conditions with our suppliers. As part of our working capital management, we facilitate a voluntary supply chain finance program to provide our 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 10 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 December 23, 2023, we had $23.8 million of cash and equivalents. In addition, we had $475.9 million available under the Credit Facility as of December 23, 2023.
We believe that our current sources of funds will provide us with adequate liquidity during the 12-month period following December 23, 2023, as well as in the long-term.
Summary of Cash Flows
The following table presents a summary of our cash flows from operating, investing, and financing activities.
For the nine months ended December 23, 2023, cash provided by operating activities was $130.5 million, which consisted of net income of $33.9 million, adjusted by non-cash charges of $64.9 million and by a change in operating assets and liabilities of $31.7 million. The non-cash charges were largely driven by $54.4 million of depreciation and amortization as well as $9.6 million in deferred income tax expense. The change in operating assets and liabilities was primarily due to our supply chain finance program being a source of cash as we improved our cash flow by $17.8 million. Additionally, the change in operating assets and liabilities was also partially due to accounts payable and accrued liabilities, net of vendor rebate receivables, being a source of cash of $30.5 million driven by timing of payments. These sources of cash were partially offset by our inventory balance being a use of cash of $12.7 million due to increased inventory purchases.
For the nine months ended December 24, 2022, cash provided by operating activities was $171.2 million, which consisted of net income of $38.6 million, adjusted by non-cash charges of $60.6 million and by a change in operating assets and liabilities of $72.0 million. The non-cash charges were largely driven by $58.2 million of depreciation and amortization. The change in operating assets and liabilities was primarily due to our supply chain finance program being a source of cash as we improved our cash flow by $94.8 million. This source of cash was partially offset by our inventory balance being a use of cash of $12.3 million due to increased inventory purchases as well as accounts payable and accrued liabilities, net of vendor rebates, being a use of cash of $9.7 million driven by timing of payments.
Cash used for / provided by investing activities
For the nine months ended December 23, 2023, cash used for investing activities was $0.3 million. This was primarily due to cash used for capital expenditures, including property and equipment, of $18.9 million, partially offset by cash provided by the escrow and earnout payments from the sale of our wholesale tire locations and distribution assets and the disposal of property and equipment of $15.8 million and $2.8 million, respectively.
For the nine months ended December 24, 2022, cash provided by investing activities was $35.6 million. This was primarily due to cash from the sale of our wholesale tire locations and tire distribution assets for $60.9 million, partially offset by cash used for capital expenditures, including property and equipment, and acquisitions of $28.5 million and $1.0 million, respectively.
For the nine months ended December 23, 2023, cash used for financing activities was $111.2 million which was primarily due to payment on our Credit Facility, net of amounts borrowed during the period, of $11.0 million, as well as payment of finance lease principal and dividends of $29.4 million and $26.8 million, respectively. Also, we used $44.0 million to repurchase common stock during the period.
For the nine months ended December 24, 2022, cash used for financing activities was $201.7 million which was primarily due to payment on our Credit Facility, net of amounts borrowed during the period, of $46.4 million, as well as payment of finance lease principal and dividends of $29.8 million and $27.5 million, respectively. Also, we used $96.9 million to repurchase common stock during the period.
Critical Accounting Estimates
The consolidated financial statements are prepared in accordance with GAAP. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. We base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows may be affected.
For a description of our critical accounting estimates, refer to Part II, Item 7., “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended March 25, 2023. There have been no material changes to our critical accounting estimates since our Form 10-K for the year ended March 25, 2023.
Recent Accounting Pronouncements
See “Recent Accounting Pronouncements” in Note 1 to our consolidated financial statements for a discussion of the impact of recently issued accounting standards on our consolidated financial statements as of December 23, 2023 and the expected impact on the consolidated financial statements for future periods.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they address future events, developments, and results and do not relate strictly to historical facts. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements include, without limitation, statements preceded by, followed by, or including words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “strategy,” “will,” “would” and variations thereof and similar expressions. Forward-looking statements are subject to risks, uncertainties, and other important factors that could cause actual results to differ materially from those expressed. For example, our forward-looking statements include, without limitation, statements regarding:
l
the impact of competitive services and pricing;
the effect of economic conditions and geopolitical uncertainty, seasonality, and the impact of weather conditions and natural disasters on customer demand;
advances in automotive technologies including adoption of electronic vehicle technology;
our dependence on third-party vendors for certain inventory;
the risks associated with vendor relationships and international trade, particularly imported goods such as those sourced from China;
the impact of changes in U.S. trade relations and the ongoing trade dispute between the United States and China, and other potential impediments to imports;
our ability to service our debt obligations, including our expected annual interest expense;
our cash needs, including our ability to fund our future capital expenditures and working capital requirements;
our anticipated sales, comparable store sales, gross profit margin, costs of goods sold (including product mix), OSG&A expenses and other fixed costs, and our ability to leverage those costs;
management’s estimates and expectations as they relate to income tax liabilities, deferred income taxes, and uncertain tax positions;
management’s estimates associated with our critical accounting policies, including business combinations, insurance liabilities, and valuations for our long-lived assets impairment analyses;
the impact of industry regulation, including changes in environmental, consumer protection, and labor laws;
potential outcomes related to pending or future litigation matters;
business interruptions;
risks relating to disruption or unauthorized access to our computer systems;
our failure to protect customer and employee personal data;
risks relating to acquisitions and the integration of acquired businesses with ours;
our growth plans, including our plans to add, renovate, re-brand, expand, remodel, relocate, or close stores and any related costs or charges, our leasing strategy for future expansion, and our ability to renew leases at existing store locations;
the impact of costs related to planned store closings or potential impairment of goodwill, other intangible assets, and long-lived assets;
expected dividend payments;
our ability to attract, motivate, and retain skilled field personnel and our key executives; and
the potential impacts of climate change on our business.
Any of these factors, as well as such other factors as discussed in Part I, Item 1A., “Risk Factors” of our Form 10-K for the fiscal year ended March 25, 2023, as well as in our periodic filings with the SEC, could cause our actual results to differ materially from our anticipated results. The information provided in this report is based upon the facts and circumstances known as of the date of this report, and any forward-looking statements made by us in this report speak only as of the date on which they are made. Except as required by law, we undertake no obligation to update these forward-looking statements after the date of this Form 10-Q to reflect events or circumstances after such date, or to reflect the occurrence of unanticipated events.
DISCLOSURES ABOUT MARKET RISK & CONTROLS AND PROCEDURES
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from potential changes in interest rates. As of December 23, 2023, excluding finance leases and financing obligations, we had no debt financing at fixed interest rates, for which the fair value would be affected by changes in market interest rates. Our cash flow exposure on floating rate debt would result in annual interest expense fluctuations of approximately $0.9 million based upon our debt position at December 23, 2023 and approximately $1.1 million based upon our debt position at March 25, 2023, given a change in SOFR of 100 basis points.
Debt financing had a carrying amount that approximates a fair value of $94.0 million as of December 23, 2023, as compared to a carrying amount and a fair value of $105.0 million as of March 25, 2023.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that we file or submit to the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In conjunction with the close of each fiscal quarter and under the supervision of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), we conduct an update, a review and an evaluation of the effectiveness of our disclosure controls and procedures. It is the conclusion of our Chief Executive Officer and Chief Financial Officer, based upon an evaluation completed as of the end of the most recent fiscal quarter reported on herein, that our disclosure controls and procedures were effective.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 23, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
EXHIBITS
PART II – OTHER INFORMATION
From time to time we are a party to or otherwise involved in legal proceedings arising out of the normal course of business. Legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of one or more of these matters could have a material adverse impact on the Company, its financial condition and results of operations.
On May 19, 2022, our Board of Directors authorized a share repurchase program for the repurchase of up to $150 million of shares of our common stock with no stated expiration. Under the program, we have repurchased 3.7 million shares of common stock at an average price of $37.61, for a total investment of $140.9 million. The table below presents information with respect to Monro common stock purchases made during the three months ended December 23, 2023, by Monro or any “affiliated purchaser” of Monro, as defined in Rule 10b-18(a)(3) under the Exchange Act.
Dollar Value of
Average
Total Number of
Shares that May
Total Number
Price
Shares Purchased
Yet Be Purchased
of Shares
Paid per
as Part of Publicly
Under Publicly
Period
Purchased
Share
Announced Programs
September 24, 2023 through October 21, 2023
53,146,593
October 22, 2023 through November 25, 2023
799,002
27.46
31,208,686
November 26, 2023 through December 23, 2023
744,565
29.63
9,149,800
1,543,567
Exhibit Index
10.70 **# – Supply Agreement, effective as of November 1, 2023, by and between Monro, Inc. and VGP Holdings LLC
10.75 – Amended and Restated Employment Agreement by and between the Company and Brian J. D’Ambrosia, dated as of October 26, 2023*
10.76 – Amended and Restated Employment Agreement by and between the Company and Michael T. Broderick, dated as of October 26, 2023*
31.1 – Certification of Michael T. Broderick pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
31.2 – Certification of Brian J. D’Ambrosia pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
32.1 – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002
101.INS - XBRL Instance Document
101.LAB - XBRL Taxonomy Extension Label Linkbase
101.PRE - XBRL Taxonomy Extension Presentation Linkbase
101.SCH - XBRL Taxonomy Extension Schema Linkbase
101.DEF - XBRL Taxonomy Extension Definition Linkbase
101.CAL - XBRL Taxonomy Extension Calculation Linkbase
104 - Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
* Management contract or compensatory plan or arrangement.
** Certain portions of this exhibit have been omitted (indicated by asterisks) pursuant to Item 601(b) of Regulation S-K, because such omitted information is (i) not material and (ii) the type of information that the registrant treats as private or confidential.
# Schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MONRO, INC.
DATE: January 24, 2024
By:
/s/ Michael T. Broderick
Michael T. Broderick
President and Chief Executive Officer (Principal Executive Officer)
/s/ Brian J. D’Ambrosia
Brian J. D’Ambrosia
Executive Vice President – Finance, Chief Financial Officer and
Treasurer
(Principal Financial Officer and Principal Accounting Officer)