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Nov. 1, 2021, 3:34 p.m. EDT

10-Q: MONRO, INC.

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(EDGAR Online via COMTEX) -- MANAGEMENT'S DISCUSSION AND ANALYSIS

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Financial Summary

Second quarter 2022 included the following notable items:

?Diluted earnings per common share ("EPS") were $0.62.

?Adjusted diluted EPS, a non-GAAP measure, were $0.62.

?Sales increased 20.5 percent, driven by an increase in comparable store sales.

?Comparable store sales increased 14.8 percent, driven primarily by an increase in guest traffic and average ticket amount.

?Operating income of $34.5 million was 41.2 percent higher than the prior year comparable period.

?Net income was $21.0 million.

?Adjusted net income, a non-GAAP measure, was $21.0 million.







        Earnings Per Common Share                      Three Months Ended                           Six Months Ended
                                                                  September 26,           September 25,   September 26,
                                          September 25, 2021          2020       Change       2021            2020       Change
        Diluted EPS                      $               0.62     $        0.38  63.2 %   $        1.08   $        0.47 129.8 %
        Adjustments                                         -              0.02                    0.09            0.08
        Adjusted diluted EPS             $               0.62     $        0.39  59.0 %   $        1.17   $        0.54 116.7 %
        


Note: Amounts may not foot due to rounding.

Adjusted diluted EPS and adjusted net income, each of which are a measure not derived in accordance with U.S. GAAP, exclude the impact of certain items. Management believes that adjusted diluted EPS and adjusted net income 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 18 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.

While we expect many teammates to return to our offices later this fiscal 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 ensure our offices are safe and functional for hybrid work that enable effective collaboration of both in-person and remote teammates.

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 may need to pay more for labor if our teammates continue working overtime in order to meet the surge in demand, which would decrease our gross profit and net income. 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.

Monro, Inc. [[Image Removed: Picture 22]] Q2 2022 Form 10-Q 14

Table of Contents







                              MANAGEMENT'S DISCUSSION AND ANALYSIS
        Analysis of Results of Operations
        Summary of Operating Income             Three Months Ended                   Six Months Ended
                                          September     September             September     September
        (thousands)                       25, 2021      26, 2020    Change    25, 2021      26, 2020    Change
        Sales                            $  347,699    $  288,587  20.5  %   $  689,517    $  535,646  28.7  %
        Cost of sales, including
        distribution and
        ?occupancy costs                    217,016       184,061  17.9         432,903       343,666  26.0
        Gross profit                        130,683       104,526  25.0         256,614       191,980  33.7
        Operating, selling, general
        and administrative expenses          96,205        80,101  20.1         194,219       156,154  24.4
        Operating income                 $   34,478    $   24,425  41.2  %   $   62,395    $   35,826  74.2  %
        


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 91 selling days in the three months ended September 25, 2021 and in the three months ended September 26, 2020, and 181 selling days in the six months ended September 25, 2021 and in the six months ended September 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             Six Months Ended
                                                    September       September     September       September
        (thousands)                                 25, 2021        26, 2020      25, 2021        26, 2020
        Sales                                      $  347,699      $  288,587    $  689,517      $  535,646
        Dollar change compared to prior year       $   59,112                    $  153,871
        Percentage change compared to prior year         20.5  %                       28.7  %
        


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 comparable prior year period was impacted by lower guest traffic affected by the COVID-19 pandemic. Additionally, there was an increase in sales from new stores. Partially offsetting these increases was a decrease in sales from closed stores during the six months ended September 25, 2021. The following table shows the primary drivers of the change in sales for each of the three months and six months ended September 25, 2021, as compared to the same period ended September 26, 2020.







                                                                  Three Months
        Sales Percentage Change                                       Ended         Six Months Ended
                                                                  September 25,        September
                                                                      2021              25, 2021
        Sales change                                                  20.5    %          28.7    %
        Primary drivers of change in sales
        Comparable stores sales                                       14.8    %          23.8    %
        New store sales (a)                                            6.2    %           6.0    %
        Closed store sales                                               -               (1.0)   %
        


(a)Sales from 2022 and 2021 acquisitions contributed 6.0 percent and 5.8 percent of the sales change for the three months and the six months ended September 25, 2021, respectively.

Monro, Inc. [[Image Removed: Picture 22]] Q2 2022 Form 10-Q 15

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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 and six months ended September 25, 2021, comparable store sales growth increased across our product categories with higher growth in our higher-margin brakes, alignment and maintenance service categories, as well as our tire category, each of which experienced declines during the three months and six months ended September 26, 2020.







        Comparable Store Product Category Sales Change     Three Months Ended            Six Months Ended
                                                       September 25, September 26,   September 25,  September
                                                           2021          2020            2021       26, 2020
        Tires                                              10      %      (3)    %       17      %      (9)  %
        Maintenance                                        15      %     (19)    %       27      %     (27)  %
        Brakes                                             33      %     (24)    %       44      %     (33)  %
        Alignment                                          31      %     (16)    %       42      %     (24)  %
        Front end/shocks                                   16      %     (19)    %       27      %     (28)  %
        Exhaust                                             9      %     (16)    %       20      %     (26)  %
        Sales by Product Category                       Three Months Ended            Six Months Ended
                                                     September 25,  September    September 25,  September
                                                         2021       26, 2020         2021        26, 2020
        Tires                                             51     %      54   %        52     %      55    %
        Maintenance                                       25            25            25            24
        Brakes                                            14            12            14            12
        Steering (a)                                       8             7             8             8
        Exhaust                                            2             2             1             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







        Stores                                       Three Months Ended     Six Months Ended
                                                     September September   September September
                                                     25, 2021  26, 2020    25, 2021  26, 2020
        Beginning store count                           1,291     1,247       1,263     1,283
        Opened (a)                                           -        1          30         1
        Closed                                             (3)       (6)         (5)      (42)
        Ending store count                              1,288     1,242       1,288     1,242
        


(a)The stores opened during the six months ended September 25, 2021 related to stores acquired from the 2022 acquisition.







        Cost of Sales and Gross Profit
        Gross Profit                                   Three Months Ended             Six Months Ended
                                                   September 25, September 26,   September 25, September 26,
        (thousands)                                    2021          2020            2021          2020
        Gross profit                               $  130,683    $  104,526      $  256,614    $  191,980
        Percentage of sales                              37.6  %       36.2  %         37.2  %       35.8  %
        Dollar change compared to prior year       $   26,157                    $   64,634
        Percentage change compared to prior year         25.0  %                       33.7  %
        


The increase in gross profit, as a percentage of sales, of 140 basis points ("bps") for the three months and six months ended September 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 staffing levels continued to normalize during the three months and six months ended September 25, 2021 as compared to minimum staffing levels in the comparable prior year period which were adjusted to lower demand due to the COVID-19 pandemic. Also, more technicians working overtime, in order to meet the surge in demand, during the three months and six months ended September 25, 2021 resulted in an increase in technician labor costs, as a percentage of sales, from the prior year comparable period.

Monro, Inc. [[Image Removed: Picture 22]] Q2 2022 Form 10-Q 16

Table of Contents







                              MANAGEMENT'S DISCUSSION AND ANALYSIS
        Gross Profit as a Percentage of Sales Change          Three Months Ended    Six Months Ended
                                                                September 25,        September 25,
                                                                     2021                 2021
        Gross profit change                                        140   bps            140   bps
        Primary drivers of change in gross profit as a
        percentage of sales
        Material costs                                             240   bps            200   bps
        Distribution and occupancy costs                           120   bps            180   bps
        Technician labor costs                                   (220)   bps          (250)   bps
        OSG&A Expenses
        OSG&A Expenses                                 Three Months Ended             Six Months Ended
                                                   September 25, September 26,   September 25, September 26,
        (thousands)                                    2021          2020            2021          2020
        OSG&A Expenses                             $  96,205     $  80,101       $  194,219    $  156,154
        Percentage of sales                             27.7   %      27.8   %         28.2  %       29.2  %
        Dollar change compared to prior year       $  16,104                     $   38,065
        Percentage change compared to prior year        20.1   %                       24.4  %
        


The increase of $16.1 million and $38.1 million in OSG&A expenses for the three months and six months ended September 25, 2021, respectively, as compared to the prior year comparable period is primarily due to increased expenses from comparable stores, mainly store management compensation to match demand and advertising expense. 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 six months ended September 25, 2021 was also partially due to increased expenses from new stores, and for the six months ended September 25, 2021, an increase in litigation settlement costs (related to the Cerini matter described in Note 10) that were included in the first quarter of fiscal 2022. Partially offsetting these increases were lower expenses for the three months and six months ended September 25, 2021 from seven stores closed compared to the prior year comparable period.







                                                               Three Months       Six Months
        OSG&A Expenses Change                                      Ended             Ended
                                                                 September         September
        (thousands)                                              25, 2021          25, 2021
        OSG&A expenses change                                     $ 16,104          $ 38,065
        Drivers of change in OSG&A expenses
        Increase from comparable stores                           $ 12,323          $ 28,442
        Increase from new stores                                  $  4,698          $  7,882
        Increase in litigation settlement costs                   $       -         $  3,920
        Decrease from closed stores                               $   (917)         $ (2,179)
        Other Performance Factors
        


Net Interest Expense

Net interest expense of $6.3 million for the three months ended September 25, 2021 decreased $1.0 million as compared to the prior year period, and decreased as a percentage of sales from 2.5 percent to 1.8 percent. Weighted average debt outstanding for the three months ended September 25, 2021 decreased by approximately $92 million as compared to the three months ended September 26, 2020. This decrease is related to a decrease in debt outstanding under our revolving credit facility (the "Credit Facility"). Partially offsetting this decrease was an increase in finance lease debt recorded in connection with the 2022 and 2021 acquisitions and greenfield expansion, along with renewed leases. The weighted average interest rate for the three months ended September 25, 2021 remained relatively flat as compared to the prior year period.

Net interest expense for the six months ended September 25, 2021 decreased $1.5 million as compared to the same period in the prior year, and decreased from 2.7 percent to 1.9 percent as a percentage of sales for the same periods. Weighted average debt outstanding decreased by approximately $193 million and the weighted average interest rate increased by approximately 70 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 six months ended September 25, 2021, was 25.7 percent and 25.6 percent, respectively, compared with 25.2 percent and 25.3 percent, respectively, in the comparable prior year periods.

Monro, Inc. [[Image Removed: Picture 22]] Q2 2022 Form 10-Q 17

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           Six Months Ended
                                                   September      September     September     September
        (thousands)                                 25, 2021      26, 2020      25, 2021      26, 2020
        Net income                                $    20,985    $   12,846    $   36,666    $   15,833
        Store impairment charge                              -           99              -           99
        Store closing costs                              (158)          (17)         (430)        2,510
        Monro.Forward initiative costs                     48           272           151           454
        Acquisition due diligence and integration
        costs                                             110            22           420            39
        Management transition costs                          -          257            59           257
        Litigation settlement costs                          -             -        3,920              -
        Provision for income taxes on adjustments            -         (147)         (997)         (787)
        Adjusted net income                       $    20,985    $   13,332    $   39,789    $   18,405
        


Adjusted diluted EPS is summarized as follows:







        Reconciliation of Adjusted Diluted EPS          Three Months Ended                Six Months Ended
                                                  September 25,       September     September 25,    September
                                                      2021             26, 2020         2021          26, 2020
        Diluted EPS                               $       0.62       $      0.38    $       1.08    $      0.47
        Store impairment charge (a)                           -             0.00                -          0.00
        Store closing costs (a)                          (0.00)            (0.00)          (0.01)          0.06
        Monro.Forward initiative costs (a)                0.00              0.01            0.00           0.01
        Acquisition due diligence and integration
        costs (a)                                         0.00              0.00            0.01           0.00
        Management transition costs (a)                       -             0.01            0.00           0.01
        Litigation settlement costs                           -                 -           0.09               -
        Adjusted diluted EPS                      $       0.62       $      0.39    $       1.17    $      0.54
        


(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 24.3 percent and 23.2 percent for the three months ended September 25, 2021 and September 26, 2020, respectively, and 24.2 percent and 23.4 percent for the six months ended September 25, 2021 and September 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.

Monro, Inc. [[Image Removed: Picture 22]] Q2 2022 Form 10-Q 18

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 September 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 $45 million in the aggregate in 2022. Additionally, we have contractual finance lease and operating lease commitments with landlords through October 2040 for $603.7 million in lease payments, of which $96.8 million is due within one year. For details regarding these lease commitments, see Note 10 to the Company's consolidated financial statements.

As of September 25, 2021, we had $170.0 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 10 to the Company's consolidated financial statements.

We paid cash dividends totaling $17.0 million ($0.50 per share) during the six months ended September 25, 2021. For details regarding our cash dividend, see Note 7 to the Company's consolidated financial statements.

We have signed definitive asset purchase agreements to acquire six and 11 retail tire and automotive repair stores located in California and Iowa, respectively. These transactions are expected to close during the third quarter of fiscal 2022 and are expected to be financed through our existing credit facility.

Sources and Conditions of Liquidity

Our sources to fund our material cash requirements are predominantly cash from . . .

Nov 01, 2021

COMTEX_396194631/2041/2021-11-01T15:34:10

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