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 1,297 Company-operated retail stores located in 32 states and 80 franchised locations as of September 24, 2022.
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 (“U.S. 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 26, 2022.
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 26, 2022.
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 years 2023 and 2022 each contain 52 weeks. Unless specifically indicated otherwise, any references to “2023” or “fiscal 2023” and “2022” or “fiscal 2022” relate to the years ending March 25, 2023 and March 26, 2022, respectively.
Recent accounting pronouncements
In September 2022, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance which requires certain disclosure requirements for supplier finance programs used in connection with the purchase of goods and services. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2022. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance.
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. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2022. Early adoption is 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) and the SEC did not or are not expected to have a material effect on our consolidated financial statements.
Working capital management
As part of our ongoing efforts to manage our working capital and improve our cash flow, we work with suppliers to optimize our purchasing terms and conditions, including extending payment terms. We also 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. We have concluded that the program is a trade payable program and not indicative of a borrowing arrangement.
Supplemental information
Property and equipment, net: Property and equipment balances are shown on the Consolidated Balance Sheets net of accumulated depreciation of $417.2 million and $414.2 million as of September 24, 2022 and March 26, 2022, respectively.
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 advertising and administration. Acquisitions in this note generally include acquisitions of five or more locations as well as acquisitions of one to four locations that are part of our greenfield store growth strategy.
2022
On April 25, 2021, we acquired 30 retail tire and automotive repair stores located in California from Mountain View Tire & Service, Inc. These stores operate under the Mountain View Tire & Service name. The acquisition was financed through our Credit Facility, as defined in Note 8. The results of operations for this acquisition are included in our financial results from the acquisition date.
The acquisition resulted in goodwill related to, among other things, growth opportunities, synergies and economies of scale expected from combining the business with ours, as well as unidentifiable intangible assets. All of the goodwill is expected to be deductible for tax purposes.
We expensed all costs related to the acquisition in the six months ended September 25, 2021. The total costs related to the completed acquisition were $0.1 million and $0.4 million for the three and six months ended September 25, 2021, respectively. These costs are included in the Consolidated Statements of Income and Comprehensive Income primarily under operating, selling, general and administrative (“OSG&A”) expenses.
Sales related to the completed acquisition for the three and six months ended September 25, 2021 totaled $11.4 million and $19.4 million, respectively, for the period from acquisition date through September 25, 2021.
Supplemental pro forma information for the current or prior reporting periods has not been presented due to the impracticability of obtaining detailed, accurate or reliable data for the periods the acquired entities were not owned by Monro.
We accounted for the acquisition as a business combination using the acquisition method of accounting and we finalized the purchase accounting related to the acquisition during the three months ended June 25, 2022. As a result of the updated purchase price allocation for the acquisition, certain of the fair value amounts previously estimated were adjusted during the measurement period. These measurement period adjustments resulted from updated valuation reports and appraisals received from our external valuation specialists, as well as revisions to internal estimates. The measurement period adjustments were not material to the Consolidated Balance Sheet as of September 24, 2022 and the Consolidated Statement of Income and Comprehensive Income for the six months ended September 24, 2022.
The acquired assets and liabilities assumed were recorded at their assigned acquisition-date fair values and were consolidated with those of the Company as of the acquisition date. The consideration transferred and net liabilities assumed were recorded as goodwill.
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2022 Acquisition-date Fair Values Assigned | | | |
(thousands) | | | |
Inventory | | $ | 937 |
Other current assets | | | 217 |
Property and equipment | | | 2,939 |
Finance lease and financing obligation assets | | | 15,758 |
Operating lease assets | | | 17,545 |
Intangible assets | | | 2,211 |
Other non-current assets | | | 63 |
Long-term deferred income tax assets | | | 4,001 |
Total assets acquired | | | 43,671 |
Current portion of finance leases and financing obligations | | | 1,447 |
Current portion of operating lease liabilities | | | 1,698 |
Deferred revenue | | | 955 |
Other current liabilities | | | 208 |
Long-term finance leases and financing obligations | | | 21,957 |
Long-term operating lease liabilities | | | 22,447 |
Other long-term liabilities | | | 754 |
Total liabilities assumed | | | 49,466 |
Total net identifiable liabilities assumed | | $ | (5,795) |
Total consideration transferred | | $ | 62,127 |
Less: total net identifiable liabilities assumed | | | (5,795) |
Goodwill | | $ | 67,922 |
The total consideration of $62.1 million is comprised of $61.0 million in cash and $1.1 million which is due upon finalization of certain lease assignment terms for one store location.
We recorded $2.2 million amortizable intangible assets, including a customer list and a trade name, with a weighted-average amortizable period of approximately eight years. We have recorded acquired right-of-use assets at the present value of remaining lease payments adjusted to reflect favorable or unfavorable market terms of the lease.
We continue to refine the valuation data and estimates primarily related to inventory, warranty reserves, intangible assets, real property leases, and certain liabilities for the 2022 acquisitions that closed subsequent to September 25, 2021 and expect to complete the valuations no later than the first anniversary date of the acquisition. We anticipate that adjustments will continue to be made to the fair values of identifiable assets acquired and liabilities assumed, and those adjustments may or may not be material.
2023
Divestitures
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 is currently being held in escrow. 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. Under the distribution agreement, 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. In connection with this transaction, we recognized a pre-tax gain of $2.4 million within OSG&A expenses. 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 during the six months ended September 24, 2022. Additionally, during the three months ended September 24, 2022, we incurred $1.3 million in costs in connection with restructuring and elimination of certain executive management positions upon completion of the divestiture. 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 will have a major effect on our operations and financial results. 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.
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Earnings per Common Share | | Three Months Ended | | Six Months Ended |
(thousands, except per share data) | | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Numerator for earnings per common share calculation: | | | | | | | | | | | | |
Net income | | $ | 13,121 | | $ | 20,985 | | $ | 25,605 | | $ | 36,666 |
Less: Preferred stock dividends | | | (129) | | | (120) | | | (258) | | | (230) |
Income available to common shareholders | | $ | 12,992 | | $ | 20,865 | | $ | 25,347 | | $ | 36,436 |
Denominator for earnings per common share calculation: | | | | | | | | | | | | |
Weighted average common shares - basic | | | 32,204 | | | 33,523 | | | 32,844 | | | 33,510 |
Effect of dilutive securities: | | | | | | | | | | | | |
Preferred stock | | | 460 | | | 460 | | | 460 | | | 460 |
Stock based awards | | | 65 | | | 44 | | | 45 | | | 56 |
Weighted average common shares - diluted | | | 32,729 | | | 34,027 | | | 33,349 | | | 34,026 |
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Basic earnings per common share | | $ | 0.40 | | $ | 0.62 | | $ | 0.77 | | $ | 1.09 |
Diluted earnings per common share | | $ | 0.40 | | $ | 0.62 | | $ | 0.77 | | $ | 1.08 |
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 six months ended September 24, 2022, our effective income tax rate was 26.6 percent and 33.6 percent, respectively, compared to 25.7 percent and 25.6 percent for the three months and six months ended September 25, 2021, respectively. Our effective income tax rate for the six months ended September 24, 2022 was higher by 6.9 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. Our effective income tax rate for the three months and six months ended September 24, 2022 was higher by 0.5 percent and 0.7 percent, respectively, due to the discrete tax impact related to share-based awards.
Note 5 – Fair Value
Long-term debt had a carrying amount that approximates a fair value of $130.0 million as of September 24, 2022, as compared to a carrying amount and a fair value of $176.5 million as of March 26, 2022. 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 $18.6 million during the six months ended September 24, 2022. The declaration and payment 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 Credit Facility 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.
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.
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Revenues | | Three Months Ended | | Six Months Ended |
(thousands) | | September 24, 2022 | | September 25, 2021 | | September 24, 2022 | | September 25, 2021 |
Tires (a) | | $ | 157,905 | | $ | 178,080 | | $ | 330,969 | | $ | 354,309 |
Maintenance | | | 90,622 | | | 85,971 | | | 180,914 | | | 170,430 |
Brakes | | | 47,062 | | | 48,173 | | | 96,217 | | | 94,148 |
Steering | | | 27,613 | | | 28,086 | | | 57,594 | | | 56,352 |
Exhaust | | | 5,921 | | | 6,581 | | | 12,196 | | | 12,370 |
Other | | | 695 | | | 808 | | | 1,463 | | | 1,908 |
Total | | $ | 329,818 | | $ | 347,699 | | $ | 679,353 | | $ | 689,517 |
(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 September 24, 2022 and March 26, 2022 were $21.5 million and $20.6 million, respectively, of which $14.8 million and $14.2 million, respectively, are reported in Deferred revenue and $6.7 million and $6.4 million, respectively, are reported in Other long-term liabilities in our Consolidated Balance Sheets.
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Changes in Deferred Revenue | | | |
(thousands) | | | |
Balance at March 26, 2022 | | $ | 20,632 |
Deferral of revenue | | | 11,355 |
Recognition of revenue | | | (10,464) |
Balance at September 24, 2022 | | $ | 21,523 |
As of September 24, 2022, we expect to recognize $8.9 million of deferred revenue related to road hazard warranty agreements in the remainder of fiscal 2023, $9.5 million of deferred revenue during our fiscal year ending March 30, 2024, and $3.1 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
In April 2019, we entered into a new five year $600 million revolving credit facility agreement with eight banks (the “Credit Facility”). Interest only is payable monthly throughout the Credit Facility’s term. The borrowing capacity for the Credit Facility of $600 million includes an accordion feature permitting us to request an increase in availability of up to an additional $250 million. The Credit Facility initially bore interest at 75 to 200 basis points over the London Interbank Offered Rate (“LIBOR”) (or replacement index) or at the prime rate, depending on the type of borrowing and the rates then in effect.
On June 11, 2020, we entered into a First Amendment to the Credit Facility (the “First Amendment”), which, among other things, amended the terms of certain of the financial and restrictive covenants in the credit agreement through the first quarter of fiscal 2022 to provide us with additional flexibility to operate our business. The First Amendment amended the interest rate charged on borrowings to be based on the greater of adjusted one-month LIBOR or 0.75 percent. For the period from June 30, 2020 to June 30, 2021, the minimum interest rate spread charged on borrowings was 225 basis points over LIBOR. Additionally, during the same
period, we were permitted to declare, make or pay any dividend or distribution up to $38.5 million in the aggregate and the acquisition of stores or other businesses up to $100 million in the aggregate were permitted if we were in compliance with the financial covenants and other restrictions in the First Amendment and Credit Facility. As of July 1, 2021, the ability of our Board of Directors to declare, make or pay any dividend or distribution and our ability to acquire stores or other businesses is no longer restricted by the terms of the Credit Facility, as amended by the First Amendment. The Credit Facility requires fees payable quarterly throughout the term between 0.125 percent and 0.35 percent of the amount of the average net availability under the Credit Facility during the preceding quarter.
On October 5, 2021, we entered into a Second Amendment to the Credit Facility (the “Second Amendment”). The Second Amendment, which among other things, amends certain of the financial terms in the Credit Agreement, as amended by the First Amendment. Specifically, the First Amendment had amended the interest rate charged on borrowings to be based on the greater of adjusted one-month LIBOR or 0.75 percent. The Second Amendment amended the interest rate to be based on the greater of adjusted one-month LIBOR or 0.00 percent. In addition, the Second Amendment updated certain provisions regarding a successor interest rate to LIBOR. Except as amended by the First Amendment and Second 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 $29.6 million outstanding letter of credit at September 24, 2022.
There was $130.0 million outstanding and $440.4 million available under the Credit Facility at September 24, 2022.
We were in compliance with all debt covenants at September 24, 2022.
Note 9 – Commitments and Contingencies
Commitments
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Commitments Due by Period | | | | | | Within | | | 2 to | | | 4 to | | | After |
(thousands) | | | Total | | | 1 Year | | | 3 Years | | | 5 Years | | | 5 Years |
Principal payments on long-term debt | | $ | 130,000 | | | | | $ | 130,000 | | | | | | |
Finance lease commitments/financing obligations (a) | | | 450,199 | | $ | 55,672 | | | 104,877 | | $ | 93,858 | | $ | 195,792 |
Operating lease commitments (a) | | | 263,732 | | | 42,132 | | | 77,216 | | | 60,971 | | | 83,413 |
Accrued rent | | | 455 | | | 370 | | | 32 | | | 25 | | | 28 |
Total | | $ | 844,386 | | $ | 98,174 | | $ | 312,125 | | $ | 154,854 | | $ | 279,233 |
(a)Finance and operating lease commitments represent future undiscounted lease payments and include $96.2 million and $63.4 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 – Share Repurchase
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. The Board of Directors did not specify a date upon which the authorization will expire. Shares repurchased under this authorization will become treasury shares.
We periodically repurchased shares of our common stock under the repurchase program through open market transactions.
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Share Repurchase Activity | | Three Months Ended | | Six Months Ended |
(thousands, except per share data) | | September 24, 2022 | | September 24, 2022 |
Number of shares purchased | | | 1,203.8 | | | | 1,617.4 | |
Average price paid per share | | $ | 44.82 | | | $ | 44.00 | |
Total repurchased | | $ | 53,962 | | | $ | 71,166 | |
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted into law. The IRA includes a one percent excise tax on stock repurchase. The new excise tax equals one percent of the fair market value of the stock repurchased, less the fair market value of stock issued, during the tax year. The excise tax applies to repurchases of stock after December 31, 2022.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Economic Conditions
The United States economy experienced high inflation during the first half of fiscal 2023 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 with additional rate increases expected in the coming months. 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, and increasing interest rates 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.
Recent Divestiture
On June 17, 2022, we completed the sale of assets relating to our wholesale tire operations (seven locations) and internal tire distribution operations to American Tire Distributors, Inc. (“ATD”). We expect to receive total consideration of $102 million, consisting of $62 million paid by ATD at closing, of which $5 million is currently being held in escrow, and the remaining $40 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. For details regarding the sale, see Note 2 to our consolidated financial statements. In the three months ended September 24, 2022, we experienced lower top-line sales due to the sale of our wholesale tire operations to ATD and we incurred $1.3 million in costs in connection with restructuring and elimination of certain executive management positions upon completion of the divestiture.
Financial Summary
Second quarter 2023 included the following notable items:
Diluted earnings per common share (“EPS”) were $0.40.
Adjusted diluted EPS, a non-GAAP measure, were $0.43.
Sales decreased 5.1 percent, due to lower overall tire sales because of the sale of our wholesale tire operations.
Comparable store sales increased 1.3 percent, driven primarily by an approximately 10 percent comparable store sales increase in approximately 300 of our small or underperforming stores.
Operating income of $23.5 million was 31.9 percent lower than the comparable prior-year period, driven primarily by a decrease in gross profit.
Net income was $13.1 million.
Adjusted net income, a non-GAAP measure, was $14.0 million.
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Earnings Per Common Share | Three Months Ended | | Six Months Ended |
| September 24, 2022 | | September 25, 2021 | Change | | September 24, 2022 | | September 25, 2021 | Change |
Diluted EPS | $ | 0.40 | | $ | 0.62 | (35.5) | % | | $ | 0.77 | | $ | 1.08 | (28.7) | % |
Adjustments | | 0.03 | | | 0.00 | | | | | 0.08 | | | 0.09 | | |
Adjusted diluted EPS | $ | 0.43 | | $ | 0.62 | (30.6) | % | | $ | 0.85 | | $ | 1.17 | (27.4) | % |
Adjusted net income and adjusted diluted EPS, each of which is a measure not derived in accordance with U.S. 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 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 19 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
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Summary of Operating Income | Three Months Ended | | Six Months Ended |
(thousands) | September 24, 2022 | | September 25, 2021 | Change | | September 24, 2022 | | September 25, 2021 | Change |
Sales | $ | 329,818 | | $ | 347,699 | (5.1) | % | | $ | 679,353 | | $ | 689,517 | (1.5) | % |
Cost of sales, including distribution and occupancy costs | | 213,083 | | | 217,016 | (1.8) | | | | 440,429 | | | 432,903 | 1.7 | |
Gross profit | | 116,735 | | | 130,683 | (10.7) | | | | 238,924 | | | 256,614 | (6.9) | |
Operating, selling, general and administrative expenses | | 93,262 | | | 96,205 | (3.1) | | | | 189,197 | | | 194,219 | (2.6) | |
Operating income | $ | 23,473 | | $ | 34,478 | (31.9) | % | | $ | 49,727 | | $ | 62,395 | (20.3) | % |
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 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 91 selling days in the three months ended September 24, 2022 and in the three months ended September 25, 2021, and 181 selling days in the six months ended September 24, 2022 and in the six months ended September 25, 2021.
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.
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Sales | | Three Months Ended | | Six Months Ended |
(thousands) | | September 24, 2022 | September 25, 2021 | | September 24, 2022 | September 25, 2021 |
Sales | | $ | 329,818 | | $ | 347,699 | | | $ | 679,353 | | $ | 689,517 | |
Dollar change compared to prior year | | $ | (17,881) | | | | | | $ | (10,164) | | | | |
Percentage change compared to prior year | | | (5.1) | % | | | | | | (1.5) | % | | | |
The sales decrease was due to a decrease in sales from closed stores, driven by the sale of our wholesale tire operations in the first quarter of fiscal 2023. Sales for the wholesale locations were approximately $28.7 million in the three months ended September 25, 2021. This was partially offset by an increase in sales from new stores and an increase in comparable store sales from an increase in average ticket amount. The following table shows the primary drivers of the change in sales for each of the three months and six months ended September 24, 2022, as compared to the same periods ended September 25, 2021.
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Sales Percentage Change | | Three Months Ended | | Six Months Ended |
| | September 24, 2022 | | September 24, 2022 |
Sales change | | | (5.1) | % | | | (1.5) | % |
Primary drivers of change in sales | | | | | | | | |
Closed store sales (a) | | | (8.5) | % | | | (4.9) | % |
New store sales (b) | | | 2.3 | % | | | 2.8 | % |
Comparable store sales (c) | | | 1.3 | % | | | 0.8 | % |
(a)Sales from the wholesale locations sold to ATD constitute most of the change between the three months ended September 24, 2022 and September 25, 2021 and the six months ended September 24, 2022 and September 25, 2021.
(b)Sales from the fiscal 2022 acquisitions represent the change between the three months ended September 24, 2022 and September 25, 2021 and the six months ended September 24, 2022 and September 25, 2021.
(c)Comparable store sales at our retail locations increased by 2.0 percent for the six months ended September 24, 2022.
Broad-based inflationary pressures impacting consumers, including higher fuel prices and the negative impact on miles driven, partly led to lower demand in some of our key service categories during the three and six months ended September 24, 2022. We expect the inflationary environment to continue to impact our customers throughout the remainder of fiscal 2023.
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Comparable Store Product Category Sales Change | Three Months Ended | | Six Months Ended |
| September 24, 2022 | September 25, 2021 | | September 24, 2022 | September 25, 2021 |
Tires (a) | 6 | % | 10 | % | | 3 | % | 17 | % |
Maintenance service | 1 | % | 15 | % | | 1 | % | 27 | % |
Brakes | (5) | % | 33 | % | | (2) | % | 44 | % |
Alignment | (8) | % | 31 | % | | (5) | % | 42 | % |
Front end/shocks | (5) | % | 16 | % | | (0) | % | 27 | % |
Exhaust | (11) | % | 9 | % | | (3) | % | 20 | % |
(a)Comparable store tire sales increased five percent at our retail locations during the six months ended September 24, 2022.
For the three and six months ended September 25, 2021, the comparable store sales increase across all product categories reflect higher traffic and higher average ticket sales compared to the prior period in which the coronavirus (“COVID-19”) pandemic had a more volatile impact on demand.
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Sales by Product Category | Three Months Ended | | Six Months Ended |
| September 24, 2022 | September 25, 2021 | | September 24, 2022 | September 25, 2021 |
Tires | 48 | % | 51 | % | | 49 | % | 52 | % |
Maintenance service | 28 | | 25 | | | 27 | | 25 | |
Brakes | 15 | | 14 | | | 14 | | 14 | |
Steering (a) | 8 | | 8 | | | 9 | | 8 | |
Exhaust | 1 | | 2 | | | 1 | | 1 | |
Total | 100 | % | 100 | % | | 100 | % | 100 | % |
(a)Steering product category includes front end/shocks and alignment product category sales.
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Change in Number of Company-Operated Retail Stores | Three Months Ended | | Six Months Ended |
| September 24, 2022 | September 25, 2021 | | September 24, 2022 | September 25, 2021 |
Beginning store count | 1,303 | 1,291 | | 1,304 | 1,263 |
Opened (a) | — | — | | 3 | 30 |
Closed | (6) | (3) | | (10) | (5) |
Ending store count | 1,297 | 1,288 | | 1,297 | 1,288 |
(a) The stores opened in the six months ended September 25, 2021 relate to stores acquired from the fiscal 2022 acquisition.
Cost of Sales and Gross Profit
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Gross Profit | | Three Months Ended | | Six Months Ended |
(thousands) | | September 24, 2022 | September 25, 2021 | | September 24, 2022 | September 25, 2021 |
Gross profit | | $ | 116,735 | | $ | 130,683 | | | $ | 238,924 | | $ | 256,614 | |
Percentage of sales | | | 35.4 | % | | 37.6 | % | | | 35.2 | % | | 37.2 | % |
Dollar change compared to prior year | | $ | (13,948) | | | | | | $ | (17,690) | | | | |
Percentage change compared to prior year | | | (10.7) | % | | | | | | (6.9) | % | | | |
The decrease in gross profit, as a percentage of sales, of 220 and 200 basis points (“bps”) for the three and six months ended September 24, 2022, respectively, as compared to the prior year comparable period were primarily due to an increase in retail material costs, which increased as a percentage of sales, as a result of a shift to a higher mix of tire sales at our retail locations and because we intentionally did not pass through in price increases the inflationary impact on material costs to a consumer already impacted by inflationary conditions. The decrease in gross profit, as a percentage of sales, was also partially due to an increase in technician labor costs, as a percentage of sales, as we made an incremental investment in technician labor costs during the last 12 months to support current and future sales growth. We do not expect further significant incremental investment in technician headcount. Partially offsetting these increases was the impact from our wholesale operations which were sold during the first three months of fiscal 2023.
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Gross Profit as a Percentage of Sales Change | Three Months Ended | | Six Months Ended |
| | September 24, 2022 | | | | September 24, 2022 | |
Gross profit change | | (220) | bps | | | | (200) | bps | |
Primary drivers of change in gross profit as a percentage of sales | | | | | | | | | |
Retail material costs | | (380) | bps | | | | (260) | bps | |
Technician labor costs | | (100) | bps | | | | (130) | bps | |
Retail distribution and occupancy costs | | - | bps | | | | - | bps | |
Impact from sale of wholesale operations | | 270 | bps | | | | 200 | bps | |
OSG&A Expenses
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OSG&A Expenses | | Three Months Ended | | Six Months Ended |
(thousands) | | September 24, 2022 | September 25, 2021 | | September 24, 2022 | September 25, 2021 |
OSG&A Expenses | | $ | 93,262 | | $ | 96,205 | | | $ | 189,197 | | $ | 194,219 | |
Percentage of sales | | | 28.3 | % | | 27.7 | % | | | 27.8 | % | | 28.2 | % |
Dollar change compared to prior year | | $ | (2,943) | | | | | | $ | (5,022) | | | | |
Percentage change compared to prior year | | | (3.1) | % | | | | | | (2.6) | % | | | |
The decrease of $2.9 million and $5.0 million in OSG&A expenses for the three months and six months ended September 24, 2022, respectively, from the comparable prior year period is primarily due to decreased expenses from comparable stores mainly a result of cost control during the three months ended September 24, 2022. The decrease in OSG&A expenses for the three months and six months ended September 24, 2022 is also partially due to the gain on the sale of our wholesale tire locations and tire distribution assets, net of closing costs and costs associated with the closing of a related warehouse that were finalized during the three months ended September 24, 2022, as well as lower expenses from 12 retail stores closed and our wholesale tire locations that were sold, as compared to the prior year comparable period, and for the six months ended September 24, 2022, a decrease in litigation settlement costs. Partially offsetting these decreases were increased expenses for the three months and six months ended September 24, 2022 from 21 new stores as well as an increase in executive management restructuring costs incurred upon completion of the sale of our wholesale tire and tire distribution assets and an increase in costs related to shareholder matters.
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OSG&A Expenses Change | Three Months Ended | | Six Months Ended |
(thousands) | September 24, 2022 | | September 24, 2022 |
OSG&A expenses change | $ | | (2,943) | | | $ | | (5,022) | |
Drivers of change in OSG&A expenses | | | | | | | | | |
Decrease from comparable stores | $ | | (4,507) | | | $ | | (4,120) | |
Decrease in litigation settlement costs | $ | | - | | | $ | | (3,920) | |
Decrease from gain on sale of wholesale tire locations and tire distribution assets, net | $ | | (788) | | | $ | | (1,968) | |
Decrease from closed retail stores and wholesale tire locations sold | $ | | (1,257) | | | $ | | (1,810) | |
Increase from new stores | $ | | 1,954 | | | $ | | 5,141 | |
Increase in management restructuring costs | $ | | 1,338 | | | $ | | 1,338 | |
Increase in costs related to shareholder matters | $ | | 317 | | | $ | | 317 | |
Other Performance Factors
Net Interest Expense
Net interest expense of $5.7 million for the three months ended September 24, 2022 decreased $0.6 million as compared to the prior year period, and decreased as a percentage of sales from 1.8 percent to 1.7 percent. Weighted average debt outstanding for the three months ended September 24, 2022 decreased by approximately $93 million as compared to the three months ended September 25, 2021. This decrease is primarily related to a decrease in debt outstanding under the Credit Facility. The weighted average interest rate increased approximately 30 basis points from the prior year quarter due primarily to an increase in Credit Facility borrowing rates.
Net interest expense for the six months ended September 24, 2022 decreased $1.9 million as compared to the same period in the prior year, and decreased from 1.9 percent to 1.7 percent as a percentage of sales for the same periods. Weighted average debt outstanding decreased by approximately $78 million and the weighted average interest rate was relatively flat 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 24, 2022 was 26.6 percent and 33.6 percent, respectively, compared with 25.7 percent and 25.6 percent in the comparable prior-year periods. Our effective income tax rate for the six months ended September 24, 2022 was higher by 6.9 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. Our effective income tax rate for the three months and six months ended September 24, 2022 was higher by 0.5 percent and 0.7 percent, respectively, due to the discrete tax impact related to share-based awards.
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:
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Reconciliation of Adjusted Net Income | Three Months Ended | | Six Months Ended |
(thousands) | September 24, 2022 | September 25, 2021 | | September 24, 2022 | September 25, 2021 |
Net income | $ | 13,121 | | $ | 20,985 | | | $ | 25,605 | | $ | 36,666 | |
Gain on sale of wholesale tire locations and tire distribution assets, net (a) | | (788) | | | — | | | | (1,968) | | | — | |
Store closing costs | | 230 | | | (158) | | | | 226 | | | (430) | |
Monro.Forward initiative costs | | 19 | | | 48 | | | | 42 | | | 151 | |
Acquisition due diligence and integration costs | | 1 | | | 110 | | | | (9) | | | 420 | |
Litigation settlement costs | | — | | | — | | | | — | | | 3,920 | |
Management restructuring/transition costs (b) | | 1,338 | | | — | | | | 1,338 | | | 59 | |
Costs related to shareholder matters | | 317 | | | — | | | | 317 | | | — | |
Provision for income taxes on pre-tax adjustments | | (280) | | | — | | | | 13 | | | (997) | |
Certain discrete tax items (c) | | — | | | — | | | | 2,644 | | | — | |
Adjusted net income | $ | 13,958 | | $ | 20,985 | | | $ | 28,208 | | $ | 39,789 | |
(a)Amount includes gain on sale, net of closing costs and costs associated with the closing of a related warehouse.
(b)Costs incurred in 2023 in connection with restructuring and elimination of certain executive management positions upon completion of our sale of wholesale tire locations and tire distribution assets.
(c)Certain discrete items related to the sale of our wholesale tire locations and tire 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:
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Reconciliation of Adjusted Diluted EPS | Three Months Ended | | Six Months Ended |
| September 24, 2022 | September 25, 2021 | | September 24, 2022 | September 25, 2021 |
Diluted EPS | $ | 0.40 | | $ | 0.62 | | | $ | 0.77 | | $ | 1.08 | |
Gain on sale of wholesale tire locations and tire distribution assets, net | | (0.02) | | | — | | | | (0.05) | | | — | |
Store closing costs (d) | | 0.01 | | | (0.00) | | | | 0.01 | | | (0.01) | |
Monro.Forward initiative costs (d) | | 0.00 | | | 0.00 | | | | 0.00 | | | 0.00 | |
Acquisition due diligence and integration costs (d) | | 0.00 | | | 0.00 | | | | 0.00 | | | 0.01 | |
Litigation settlement costs | | — | | | — | | | | — | | | 0.09 | |
Management restructuring/transition costs (d) | | 0.03 | | | — | | | | 0.03 | | | 0.00 | |
Costs related to shareholder matters | | 0.01 | | | — | | | | 0.01 | | | — | |
Certain discrete tax items | | — | | | — | | | | 0.08 | | | — | |
Adjusted diluted EPS | $ | 0.43 | | $ | 0.62 | | | $ | 0.85 | | $ | 1.17 | |
(d)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 pre-tax adjustments to diluted EPS reflect estimated annual effective income tax rates on pre-tax income before giving effect to discrete items of 25.1 percent and 24.3 percent for the three months ended September 24, 2022 and September 25, 2021, respectively, and 25.0 percent and 24.2 percent for the six months ended September 24, 2022 and September 25, 2021, respectively. See the pre-tax 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 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.
Material Cash Requirements
We currently expect our capital expenditures to support our projects, including upgrading our facilities and systems, to be $40 million to $50 million in the aggregate in 2023. Additionally, we have contractual finance lease and operating lease commitments with landlords through October 2040 for $554.4 million in lease payments, of which $96.6 million is due within one year. For details regarding these lease commitments, see Note 9 to our consolidated financial statements.
As of September 24, 2022, we had $130.0 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.
We paid cash dividends totaling $18.6 million ($0.56 per share) during the six months ended September 24, 2022. For details regarding our cash dividend, see Note 6 to our consolidated financial statements.
We returned $71.2 million to shareholders through share repurchases during the six months ended September 24, 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 10 to our consolidated financial statements.
Working Capital Management
We work with suppliers to optimize payment terms and conditions on accounts payable to enhance timing of working capital and cash flows. As part of these efforts, we facilitate a voluntary supply chain finance program to provide 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 1 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 September 24, 2022, we had $9.8 million of cash and equivalents. In addition, we had $440.4 million available under the Credit Facility as of September 24, 2022.
We believe that our current sources of funds will provide us with adequate liquidity during the 12-month period following September 24, 2022, 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.
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Summary of Cash Flows | | Six Months Ended |
(thousands) | | September 24, 2022 | | September 25, 2021 |
Cash provided by operating activities | | $ | 120,289 | | $ | 102,318 |
Cash provided by (used for) investing activities | | | 37,917 | | | (71,209) |
Cash used for financing activities | | | (156,360) | | | (54,426) |
Increase (decrease) in cash and equivalents | | | 1,846 | | | (23,317) |
Cash and equivalents at beginning of period | | | 7,948 | | | 29,960 |
Cash and equivalents at end of period | | $ | 9,794 | | $ | 6,643 |
Cash provided by operating activities
For the six months ended September 24, 2022, cash provided by operating activities was $120.3 million, which consisted of net income of $25.6 million, adjusted by non-cash charges of $38.3 million and by a change in operating assets and liabilities of $56.4 million. The non-cash charges were largely driven by $39.4 million of depreciation and amortization. The change in operating assets and liabilities was primarily due to accounts payable and accrued liabilities, net of vendor rebate receivables, being a source of cash of $16.6 million driven by timing of payments as well as our supply chain finance program being a source of cash as we improved our cash flow by $48.2 million. These sources of cash were partially offset by our inventory balance being a use of cash of $6.1 million due to increased inventory purchases
For the six months ended September 25, 2021, cash provided by operating activities was $102.3 million, which consisted of net income of $36.7 million, adjusted by non-cash charges of $49.1 million and by a change in operating assets and liabilities of $16.5 million. The non-cash charges were largely driven by $40.3 million of depreciation and amortization. The change in operating assets and liabilities was primarily due to accounts payable and accrued liabilities, net of vendor rebate receivables, being a source of cash of $10.4 million driven by timing of payments, as well as our federal and state income taxes receivable being a source of cash of $8.6 million due largely to an income tax refund that was received. These sources of cash were partially offset by our inventory balance being a use of cash of $1.7 million due to increased inventory purchases.
Cash provided by / used for investing activities
For the six months ended September 24, 2022, cash provided by investing activities was $37.9 million. This was primarily due to cash from the sale of our wholesale tire locations and tire distribution assets for $56.6 million, partially offset by cash used for capital expenditures, including property and equipment, of $19.6 million.
For the six months ended September 25, 2021, cash used for investing activities was $71.2 million. This was primarily due to cash used for acquisitions and capital expenditures, including property and equipment, of $62.3 million and $10.0 million, respectively. Included in the $62.3 million used for acquisitions was $0.8 million paid to the seller of the 2021 acquisition as the lease assignment for one store location was finalized during the period.
Cash used for financing activities
For the six months ended September 24, 2022, cash used for financing activities was $156.4 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 $20.1 million and $18.6 million, respectively. Also, we used $71.2 million to repurchase common stock during the period.
For the six months ended September 25, 2021, cash used for financing activities was $54.4 million which was due to payment of the Credit Facility, net of amounts borrowed during the period, finance lease principal of $20.0 million and $19.4 million, respectively, as well as payment of dividends of $17.0 million.
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 26, 2022. There have been no material changes to our critical accounting estimates since our Form 10-K for the year ended March 26, 2022.
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 September 24, 2022 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:
•the potential effect of general business or economic conditions on our business, including the direct and indirect effects of the COVID-19 pandemic and the Russian invasion of Ukraine on the economy, inflation, consumer demand and spending levels, and labor shortages in our markets;
•the impact of competitive services and pricing;
•the effect of economic conditions, seasonality, and the impact of weather conditions and natural disasters on customer demand;
•advances in automotive technologies;
•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 goodwill and indefinite-lived intangible assets impairment analyses;
•the impact of industry regulation, including changes in 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;
•our ability to realize the expected benefits of the transaction with American Tire Distributors, Inc.;
•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, 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 26, 2022, 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from potential changes in interest rates. As of September 24, 2022, 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 $1.3 million based upon our debt position at September 24, 2022 and approximately $1.8 million based upon our debt position at March 26, 2022, given a change in LIBOR (or replacement index) of 100 basis points.
Debt financing had a carrying amount that approximates a fair value of $130.0 million as of September 24, 2022, as compared to a carrying amount and a fair value of $176.5 million as of March 26, 2022.
Item 4. Controls and Procedures
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, 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 September 24, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.