(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.
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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.
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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.
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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.
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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 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.
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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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