MONRO, INC. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Summary
First quarter 2022 included the following notable items:
?Diluted earnings per common share ("EPS") were
?Adjusted diluted EPS, a non-GAAP measure, were
?Sales increased 38.4 percent, driven by an increase in comparable store sales.
?Comparable store sales increased 34.5 percent, driven primarily by an increase in guest traffic and average ticket amount.
?Operating income of
?Net income was
?Adjusted net income, a non-GAAP measure, was
Earnings Per Common Share Three Months Ended
June 26, 2021 June 27, 2020 Change
Diluted EPS $ 0.46 $ 0.09 411.1 %
Adjustments 0.09 0.06
Adjusted diluted EPS $ 0.55 $ 0.15 266.7 %
Adjusted diluted EPS and adjusted net income, each of which are a measure not
derived in accordance with
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 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.
While we expect many teammates to return to our offices later this calendar year, 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 insure our offices are safe and functional for hybrid work that enable effective collaboration of both in-person and remote teammates.
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.
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Analysis of Results of Operations
Summary of Operating Income Three Months Ended (thousands) June 26, 2021 June 27, 2020 Change Sales$ 341,818 $ 247,059 38.4 % Cost of sales, including distribution and occupancy costs 215,887 159,605 35.3 Gross profit 125,931 87,454 44.0 Operating, selling, general and administrative expenses 98,014 76,053 28.9 Operating income$ 27,917 $ 11,401 144.9 % 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 90 selling days
in the three months ended
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 (thousands) June 26, 2021 June 27, 2020 Sales$ 341,818 $ 247,059
Dollar change compared to prior year
38.4 %
The sales increase was primarily due to an increase in comparable store sales
from an increase in guest traffic and average ticket amount as the prior year
period includes the low point of guest traffic during the COVID-19 pandemic to
date. 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 between the
three months ended
Sales Percentage Change Three Months Ended
June 26, 2021
Sales change 38.4 %
Primary drivers of change in sales
Comparable stores sales 34.5 %
New store sales (a) 5.7 %
Closed store sales (1.3) %
(a)Sales from 2022 and 2021 acquisitions represented 5.5 percent of the change
between the three months ended
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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 ended
Comparable Store Product Category Sales Change Three Months Ended
June 26, 2021 June 27, 2020
Tires 25 % (14) %
Maintenance 42 % (35) %
Brakes 57 % (41) %
Alignment 54 % (32) %
Front end/shocks 40 % (36) %
Exhaust 35 % (37) %
Sales by Product Category Three Months Ended
June 26, 2021 June 27, 2020
Tires 52 % 56 %
Maintenance 25 23
Brakes 14 12
Steering (a) 8 8
Exhaust 1 1
Total 100 % 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 atMarch 27, 2021 1,263 Opened (a) 30 Closed (2) Ending store count atJune 26, 2021 1,291
(a)Related to stores acquired from the 2022 acquisition.
Cost of Sales and Gross Profit
Gross Profit Three Months Ended (thousands) June 26, 2021 June 27, 2020 Gross profit$ 125,931 $ 87,454 Percentage of sales 36.8 % 35.4 %
Dollar change compared to prior year
44.0 %
The increase in gross profit, as a percentage of sales, of 140 basis points
("bps") from the prior year comparable period was primarily 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. The increase in gross profit, as a percentage of sales, was also
partially due to a decrease in material costs, as a percentage of sales, as a
result of a shift in sales mix to our higher margin brakes and maintenance
service categories. Additionally, through the use of our tire category and
management pricing tool in place, we expanded our gross profit per tire from the
prior year comparable period. Partially offsetting these decreases was an
increase in technician labor costs, which increased as a percentage of sales, as
staffing levels continue to normalize during the three months ended
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Gross Profit as a Percentage of Sales Change Three Months Ended
June 26, 2021
Gross profit change 140 bps
Primary drivers of change in gross profit as a percentage of sales Distribution and occupancy costs
260 bps
Material costs 170 bps
Technician labor costs (280) bps
OSG&A Expenses
OSG&A Expenses Three Months Ended
(thousands) June 26, 2021 June 27, 2020
OSG&A Expenses $ 98,014 $ 76,053
Percentage of sales 28.7 % 30.8 %
Dollar change compared to prior year
28.9 %
The increase of
OSG&A Expenses Change Three Months Ended (thousands) June 26, 2021 OSG&A expenses change $ 21,961 Drivers of change in OSG&A expenses Increase from comparable stores $ 16,153 Increase in litigation settlement costs $ 3,920 Increase from new stores $ 3,185 Decrease from closed stores $ (1,297) Other Performance Factors Net Interest Expense
Net interest expense of
Provision for Income Taxes
For the three months ended
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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 (thousands) June 26, 2021 June 27, 2020 Net income$ 15,681 $ 2,987 Store closing costs (272) 2,527 Monro.Forward initiative costs 103 182 Acquisition due diligence and integration costs 310 17 Management transition costs 59 - Litigation settlement costs 3,920 - Provision for income taxes on adjustments (997) (641) Adjusted net income$ 18,804 $ 5,072
Adjusted diluted EPS is summarized as follows:
Reconciliation of Adjusted Diluted EPS Three Months Ended
June 26, 2021 June 27, 2020
Diluted EPS $ 0.46 $ 0.09
Store closing costs (0.01) 0.06
Monro.Forward initiative costs (a) - -
Acquisition due diligence and integration costs (a) 0.01 -
Management transition costs (a) - -
Litigation settlement costs 0.09 -
Adjusted diluted EPS $ 0.55 $ 0.15
(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.
The adjustments to diluted EPS reflect effective tax rates of 24.2 percent and
23.5 percent for the three months ended
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.
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
Accordingly, we believe that our current sources of funds will provide us with
adequate liquidity during the 12-month period following
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
As of
We paid cash dividends totaling
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
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