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MNRO > SEC Filings for MNRO > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for MONRO MUFFLER BRAKE INC

Form 10-Q for MONRO MUFFLER BRAKE INC


8-Nov-2012

Quarterly Report


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

The statements contained in this Quarterly Report on Form 10-Q that are not historical facts, including (without limitation) statements made in the Management's Discussion and Analysis of Financial Condition and Results of Operations, may contain statements of future expectations and other forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. When used in this report, statements containing the words "believe", "anticipate", "intend", "expect", "may", "could", "plan", "continue", "should", "project", "estimate" and words of similar report constitute forward-looking statements. Forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed. These factors include, but are not necessarily limited to, the effect of economic conditions, product demand, dependence on and competition within the primary markets in which the Company's stores are located, the need for and costs associated with store renovations and other capital expenditures, the impact of competitive services and pricing, product development, parts supply restraints or difficulties, industry regulation, risks relating to leverage and debt service (including sensitivity to fluctuations in interest rates), continued availability of capital resources and financing, risks relating to protection of customer and employee personal data, risks relating to litigation, risks relating to integration of acquired businesses, the availability of vendor rebates and other factors set forth or incorporated elsewhere herein and in the Company's other Securities and Exchange Commission filings, including the risk factors set forth in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2012. Except as required by law, the Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.

Results of Operations

The following table sets forth income statement data of Monro Muffler Brake,
Inc. ("Monro" or the "Company") expressed as a percentage of sales for the
fiscal periods indicated:



                                                      Quarter Ended               Six Months Ended
                                                    Fiscal September              Fiscal September
                                                   2012           2011           2012           2011
Sales                                              100.0  %       100.0  %       100.0  %       100.0  %

Cost of sales, including distribution and
occupancy costs                                      60.4           58.8           60.1           58.0

Gross profit                                         39.6           41.2           39.9           42.0

Operating, selling, general and
administrative expenses                              28.4           26.6           28.5           26.9

Operating income                                     11.2           14.5           11.4           15.2

Interest expense - net                                0.8            0.8            0.8            0.7

Other income - net                                   (0.1 )         (0.1 )         (0.1 )         (0.1 )

Income before provision for income taxes             10.5           13.8           10.7           14.5

Provision for income taxes                            3.9            5.1            4.0            5.5

Net income                                           6.5  %         8.7  %         6.7  %         9.0  %

Second Quarter and Six Months Ended September 29, 2012 Compared to Second Quarter and Six Months Ended September 24, 2011

Sales were $176.5 million for the quarter ended September 29, 2012 as compared with $173.3 million in the quarter ended September 24, 2011. The sales increase of $3.2 million or 1.9%, was due to an increase of $15.4 million related to new stores. Partially offsetting this was a comparable store sales decrease of 4.6% and a decrease in sales from closed stores amounting to $1.9 million. There were 91 selling days in both the quarter ended September 29, 2012 and the quarter ended September 24, 2011.

During the quarter ended September 24, 2011, the Company completed the bulk sale of approximately $2.9 million of slower moving inventory to a barter company in exchange for barter credits. There was no similar transaction for the quarter ended September 29, 2012.


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Sales were $345.7 million for the six months ended September 29, 2012 as compared with $338.1 million in the six months ended September 24, 2011. The sales increase of $7.6 million or 2.2%, was due to an increase of $33.1 million related to new stores. This was partially offset by a decrease in comparable store sales of 5.9% and a decrease in sales from closed stores amounting to $3.6 million. There were 181 selling days in both the first six months of fiscal 2013 and 2012.

At September 29, 2012, the Company had 853 company-operated stores and three franchised locations as compared with 802 company-operated stores and three franchised locations at September 24, 2011. (At March 31, 2012, the Company had 803 Company-operated stores.) During the quarter ended September 29, 2012, the Company added 18 stores and closed one store. Year to date, the Company added 56 stores and closed six.

Management believes that the decline in comparable store sales resulted mainly from the continued weak U.S. economy and the continuing impact of a mild winter in 2011 and early 2012. With lack of consumer confidence and high unemployment, management believes that customers are continuing to defer tire purchases and service repairs, especially on higher ticket items. While it appears that some repairs and tire purchases are being deferred, most can only be deferred for a period of time due to safety issues or state inspection requirements.

Gross profit for the quarter ended September 29, 2012 was $69.9 million or 39.6% of sales as compared with $71.3 million or 41.2% of sales for the quarter ended September 24, 2011. The decrease in gross profit for the quarter ended September 29, 2012, as a percentage of sales, is due to several factors.

Distribution and occupancy costs increased as a percentage of sales from the prior year as the Company, with lower overall comparable store sales, lost leverage on these largely fixed costs.

Additionally, labor costs increased slightly as a percentage of sales as compared to the prior year. With lower sales, there was an increase in subsidized wages because technicians are less productive.

Total material costs, including outside purchases, were virtually flat as a percentage of sales as compared to the prior year. The Company experienced increases in tire costs as compared to the same quarter of the prior year, and for competitive reasons, did not increase selling prices to the degree that would have preserved gross margin percentages at prior year levels. Additionally, there was a shift in mix to the lower margin service and tire categories, the latter due in part to the acquisition of more tire stores. These increases were largely offset by a decrease in oil costs as compared to the prior year, helped in part by the Company's newly-negotiated oil pricing. Additionally, the Company completed the bulk sale of approximately $2.9 million of slower moving inventory to a barter company in exchange for barter credits during the quarter ended September 24, 2011, and the margin recognized in these transactions is typically less than the Company's normal profit margin. The barter transaction for the quarter ended September 24, 2011 decreased gross profit as a percentage of sales by .2%.

Gross profit for the six months ended September 29, 2012 was $138.0 million, or 39.9% of sales, as compared with $142.1 million or 42.0% of sales for the six months ended September 24, 2011. The year-to-date decrease in gross profit as a percent of sales is largely due to increased distribution and occupancy costs and labor costs, due to loss of leverage on lower comparable store sales.

Operating expenses for the quarter ended September 29, 2012 were $50.1 million or 28.4% of sales as compared with $46.1 million or 26.6% of sales for the quarter ended September 24, 2011. Increased operating expenses such as manager pay, advertising and supplies related to the fiscal 2012 and 2013 acquired stores accounted for $3.9 million of the increase.

For the six months ended September 29, 2012, operating expenses increased by $7.8 million to $98.5 million from the comparable period of the prior year and were 28.5% of sales as compared to 26.9%. Operating expenses related to the fiscal 2012 and 2013 acquired stores totaled $8.6 million, which was offset by reduced operating expenses at the Company's existing stores. This demonstrates that the Company experienced leverage in this line on a comparable store basis through focused cost control and pay plans which appropriately adjust for performance.

Operating income for the quarter ended September 29, 2012 of approximately $19.7 million decreased by 21.7% as compared to operating income of approximately $25.2 million for the quarter ended September 24, 2011, and decreased as a percentage of sales from 14.5% to 11.2%.

Operating income for the six months ended September 29, 2012 of approximately $39.4 million decreased by 23.2% as compared to operating income of approximately $51.3 million for the six months ended September 24, 2011, and decreased as a percentage of sales from 15.2% for the six months ended September 24, 2011 to 11.4% for the six months ended September 29, 2012.

Net interest expense for the quarter ended September 29, 2012 remained flat at approximately $1.4 million and .8% as a percentage of sales, as compared to the same period in the prior year. The weighted average debt outstanding for the quarter ended September 29, 2012 increased by approximately $31 million as compared to the quarter ended September 24, 2011, primarily related to an increase in debt outstanding under the Company's revolving Credit Facility agreement. Largely offsetting this increase was a


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decrease in the weighted average interest rate of approximately 260 basis points from the prior year due to a shift in the percentage of debt (revolver vs. capital leases) outstanding at a lower rate. Additionally, amortization of financing fees over the higher outstanding revolving credit balance for the quarter is causing a decrease in the weighted average interest rate.

Net interest expense for the six months ended September 29, 2012 increased by approximately $.2 million as compared to the same period in the prior year, and increased .1% as a percentage of sales for the same periods. Weighted average debt increased by approximately $30 million and the weighted average interest rate decreased by approximately 230 basis points as compared to the same period of the prior year.

The effective tax rate for the quarter ended September 29, 2012 and September 24, 2011 was 37.6% and 37.0%, respectively, of pre-tax income.

The effective tax rate for the six months ended September 29, 2012 and September 24, 2011 was 37.2% and 37.8%, respectively, of pre-tax income.

Net income for the quarter ended September 29, 2012 of $11.5 million decreased 23.6% from net income for the quarter ended September 24, 2011. Earnings per share on a diluted basis for the quarter ended September 29, 2012 of $.36 decreased 23.4%.

For the six months ended September 29, 2012, net income of $23.2 million decreased 24.1% and diluted earnings per share of $.72 decreased 24.2%.

Capital Resources and Liquidity

Capital Resources

The Company's primary capital requirements in fiscal year 2013 are the upgrading of its facilities and systems, including the completion of the approximate $4.5 million expansion of the Rochester, New York office and warehouse facility begun in fiscal 2012, and the funding of its store expansion program, including potential acquisitions of existing store chains. For the six months ended September 29, 2012, the Company's primary capital requirements involved the funding of the fiscal year 2013 acquisitions totaling $57.5 million as well as the upgrading of facilities and systems and the funding of its store expansion program totaling $12.1 million. Funds for these capital expenditures were provided primarily by cash flow from operations and from the Company's revolving credit facility.

The Company paid cash dividends of $6.4 million during the six months ended September 29, 2012. In May 2012, the Company's Board of Directors declared its intention to pay a regular quarterly cash dividend of $.10 per common share or common share equivalent beginning with the first quarter of fiscal year 2013. However, the declaration of and any determination as to the payment of future dividends will be at the discretion of the Board of Directors and will depend on the Company's financial condition, results of operations, capital requirements, compliance with charter and credit facility restrictions, and such other factors as the Board of Directors deems relevant.

In October 2012, the Company acquired five retail tire and automotive repair stores from ChesleyCo. Inc. and one retail tire and automotive repair store from Brothers Tire, Inc. These acquisitions were financed through the Company's existing credit facility.

Additionally, the Company has signed a definitive asset purchase agreement to acquire certain retail tire stores from Everybody's Oil Corporation. This transaction is expected to close during the third quarter of fiscal year 2013. This acquisition will be financed through the Company's existing credit facility.

The Company also plans to continue to seek suitable acquisition candidates. Management believes that the Company has sufficient resources available (including cash and equivalents, net cash flow from operations and bank financing) to expand its business as currently planned for the next twelve months.

Liquidity

In June 2011, the Company entered into a five-year $175 million revolving Credit Facility agreement with seven banks. The Credit Facility amends and restates, in its entirety, the Credit Facility agreement previously entered into by the Company as of July 2005 and amended from time to time. The Credit Facility also provides an accordion feature permitting the Company to request an increase in availability of up to an additional $75 million. There was $47 million outstanding at September 29, 2012. The Company was in compliance with all debt covenants at September 29, 2012.


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Within the Credit Facility, the Company has available a sub-facility of $40 million for the purpose of issuing standby letters of credit. There was an outstanding letter of credit for $20 million at September 29, 2012.

The net availability under the Credit Facility at September 29, 2012 was $108 million.

Specific terms of the Credit Facility permit the payment of cash dividends not to exceed 50% of the prior year's net income, and permit mortgages and specific lease financing arrangements with other parties with certain limitations. Additionally, the Credit Facility is not secured by the Company's real property, although the Company has agreed not to encumber its real property, with certain permissible exceptions. The agreement also requires the maintenance of specified interest and rent coverage ratios.

The Company has financed certain store properties and equipment with capital leases, which amount to $48.1 million at September 29, 2012 and are due in installments through 2042.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued new accounting guidance that revises the manner in which entities present comprehensive income in their financial statements. The guidance removed the presentation options in previously issued accounting guidance on comprehensive income, and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. The guidance does not change the items that must be reported in other comprehensive income. This guidance is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2011. The adoption of this guidance in the first quarter of fiscal 2013 required new presentation of the Company's Consolidated Financial Statements.

In September 2012, the Financial Accounting Standards Board issued updated guidance on the periodic testing of indefinite-lived intangible assets for impairment. This guidance will allow companies to assess qualitative factors to determine if it is more-likely-than-not that indefinite-lived intangible assets might be impaired and whether it is necessary to perform further impairment testing required under current accounting standards. This guidance is applicable for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company expects to adopt this guidance in the third quarter of fiscal 2013. The guidance is not expected to have an impact on the Company's Consolidated Financial Statements.

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