MONRO, INC. - Annual Report: 2020 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-K

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(Mark One)

For the fiscal year ended March 28, 2020

OR

Commission File Number 0-19357

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Monro, Inc.

(Exact name of Registrant as specified in its Charter)

Registrant’s telephone number, including area code: (585) 647-6400

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Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x   NO o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES o   NO x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x   NO o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). YES x   NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o   NO x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The Nasdaq Stock Market on September 27, 2019 was $2,556,600,000.

The number of shares of Registrant’s Common Stock outstanding as of May 22, 2020 was 33,284,357.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s definitive proxy statement (to be filed pursuant to Regulation 14A) for the 2020 Annual Meeting of Shareholders to be held August 18, 2020 (the “Proxy Statement”) are incorporated by reference in Part III of this report.

TABLE OF CONTENTS

PART I

FORWARD-LOOKING STATEMENTS

The statements contained in this Annual Report on Form 10-K that are not historical facts, including (without limitation) statements made in Item 1. “Business” and Item 7. “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 Annual Report on Form 10-K, the words “anticipates,” “believes,” “contemplates,” “expects,” “see,” “could,” “may,” “estimate,” “appear,” “intend,” “plans,” “potential,” “strategy,” “will” and variations thereof and similar expressions, are intended to identify 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, product demand, dependence on and competition within the primary markets in which Monro, Inc.’s (“Monro,” the “Company,” “we,” “us,” or “our”) stores are located, the need for and costs associated with store renovations and other capital expenditures, the duration and impact of the novel strain of coronavirus (“COVID-19”) pandemic and its impact on our customers, executive officers and employees, the effect of economic conditions, seasonality, the impact of weather conditions and natural disasters, the impact of competitive services and pricing, parts supply restraints or difficulties, our dependence on vendors, including foreign vendors, changes in U.S. or foreign trade policies, including the impacts of tariffs on products imported from China, industry regulation, risks relating to leverage and debt service (including sensitivity to fluctuations in interest rates), continued availability of capital resources and financing, advances in automotive technologies, disruption or unauthorized access to our computer systems, risks relating to protection of customer and employee personal data, business interruptions, risks relating to litigation, risks relating to integration of acquired businesses, including goodwill impairment and the risks set forth in Item 1A. “Risk Factors”. Except as required by law, we do not undertake and specifically disclaim any obligation to update any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

EXPLANATORY NOTE

The Company relied on the Securities and Exchange Commission’s Order under Section 36 of the Securities Exchange Act of 1934 Modifying Exemptions from the Reporting and Proxy Delivery Requirements for Public Companies dated March 25, 2020 (Release No. 34-88465) (the “Release”) to delay the filing of its Annual Report on Form 10-K for the fiscal year ended March 28, 2020 (the “2020 10-K”), due to circumstances related to the COVID-19 pandemic. In particular, COVID-19 has caused severe disruptions in Company operations including limited access to and support from the Company’s accounting staff, which caused a delay in the Company’s ability to complete the 2020 10-K by the original due date of May 27, 2020. On May 27, 2020, the Company filed a Current Report on Form 8-K which stated that it expected to file its 2020 10-K no later than 45 days after the original due date, in compliance with the provisions of the Release.

Item 1. Business

GENERAL

Monro is a chain of 1,283 Company-operated stores (as of March 28, 2020), 98 franchised locations, eight wholesale locations, three retread facilities and two dealer-operated stores providing automotive undercar repair and tire sales and services in the United States. At March 28, 2020, Monro operated Company stores in 32 states, including Arkansas, California, Connecticut, Delaware, Florida, Georgia, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, West Virginia and Wisconsin, primarily under the names “Monro Auto Service and Tire Centers,” “Tread Quarters Discount Tire Auto Service Centers,” “Mr. Tire Auto Service Centers,” “Autotire Car Care Centers,” “Tire Warehouse Tires for Less,” “Tire Barn Warehouse,” “Ken Towery’s Tire & Auto Care,” “Tire Choice Auto Service Centers,” and “Car-X Tire & Auto”. Company-operated stores typically are situated in high-visibility locations in suburban areas and small towns, as well as in major metropolitan areas. Company-operated stores serviced approximately 6.1 million vehicles in fiscal 2020. (References herein to fiscal years are to our year ended fiscal March, e.g., references to "fiscal 2020" are to our fiscal year ended March 28, 2020.)

The predecessor to the Company was founded by Charles J. August in 1957 as a Midas Muffler franchise in Rochester, New York, specializing in mufflers and exhaust systems. Monro was incorporated in the State of New York in 1959. In 1966, we discontinued our affiliation with Midas Muffler, and began to diversify into a full line of undercar repair services. An investor group led by Peter J. Solomon and Donald Glickman purchased a controlling interest in the Company in July 1984. At that time, Monro operated 59 stores, located primarily in upstate New York, with approximately $21 million in sales in fiscal 1984. Since 1984, we have continued our growth and have expanded our marketing area to include 31 additional states.

Our principal executive offices are located at 200 Holleder Parkway, Rochester, New York 14615, and our telephone number is (585) 647-6400.

We provide tire sales and services as well as a broad range of routine maintenance services, including state inspections, 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. We specialize in the repair and replacement of parts which must be periodically replaced as they wear out. Normal wear on these parts generally is not covered by new car warranties. We typically do not perform under-the-hood repair services except for routine maintenance services, such as oil change services, various “flush and fill” services and some minor tune-up services.

All of the Company-operated stores, except Tire Warehouse Tires for Less (“Tire Warehouse”) and Tire Barn Warehouse stores, provide the services described above. Tire Warehouse and Tire Barn Warehouse stores only sell tires and tire related services and alignments. However, a growing number of our Company-operated stores are more specialized in tire replacement and service and, accordingly, have a higher mix of sales in the tire category. These Company-operated stores are described below as tire stores, whereas the remaining stores are described as service stores. (See additional discussion under “Operations”.) The acquisition of tire stores, as well as rebranding certain service stores to tire stores, allows us to fill in our existing markets with a second store more specialized in tire replacement and service. We believe this provides us with a competitive advantage, and we utilize this fill-in strategy to maximize density in the markets we operate in.

Included in the number of Company-operated stores described as tire stores are certain locations that also service commercial customers. Our locations that serve commercial customers conduct tire and automotive repair activities that are similar to our retail locations, other than with respect to the sales mix resulting from the sale of commercial tires. At March 28, 2020, there were 499 stores designated as service stores and 784 as tire stores.

In recent years, we have acquired multiple wholesale locations as well as retread facilities located in numerous states that operate under various names. The wholesale locations, in most cases, sell tires to customers for resale, although these tire sales do not include installation or other tire related services. The retread facilities re-manufacture tires through the replacement of tread on worn tires that are later sold to customers.

As of March 28, 2020, Monro had eight wholesale locations and three retread facilities.

Our sales mix for fiscal 2020, 2019 and 2018 was as follows:

The Company has four wholly-owned operating subsidiaries, Monro Service Corporation, Car-X, LLC, MNRO Holdings, LLC and MNRO Service Holdings, LLC. Both of MNRO Holdings, LLC and MNRO Service Holdings, LLC, each of which are a Delaware limited liability company, were organized in connection with our West Coast operations.

Monro Service Corporation, a Delaware corporation, holds all assets, rights, responsibilities and liabilities associated with our warehousing, purchasing, advertising, accounting, office services, payroll, cash management and certain other operations. We believe that this structure has enhanced operational efficiency and provides cost savings.

On April 25, 2015, we acquired the Car-X brand, as well as the franchise rights for 146 auto service centers from Car-X Associates Corp. Car-X, LLC, a Delaware limited liability company, operates as the franchisor through a standard royalty agreement, while Car-X remains a separate and independent brand and business with franchise operations based in Illinois.

As of March 28, 2020, Monro had 97 Car-X franchised locations.

Our operations are organized and managed in one operating segment. The internal management financial reporting that is the basis for evaluation in order to assess performance and allocate resources by our chief operating decision maker consists of consolidated data that includes the results of our retail, commercial and wholesale locations. As such, our one operating segment reflects how our operations are managed, how resources are allocated, how operating performance is evaluated by senior management and the structure of our internal financial reporting.

INDUSTRY OVERVIEW

There are a number of industry trends driving a favorable shift in the automotive aftermarket. New car sales have been robust over the past five years,¹ resulting in consistent growth in the number of vehicles on the road,² which on average (and prior to the COVID-19 pandemic) are being driven more miles per year.³ Over the past few years, the industry grew significantly in vehicles zero to five years old, driven by the growth in new car sales after the Great Recession.⁴ Conversely, six to 11 year old vehicles, which we consider our targeted segment, declined over the past several years.⁵ However, we believe these structural headwinds were transitory, and have started to turn into tailwinds, a trend we expect to continue over the next few years as the shifting dynamic of the age of vehicles in operation indicates the volume of vehicles in the six to 11 year old range, which drive the most repair opportunities, are expected to grow 27 percent from 2018-2023.⁶ This is evidenced by the increasing average age of cars and light trucks in the United States, which rose to 11.8 years in 2019.⁷

Additionally, vehicles generally need more service and repairs as they advance in age. However, as consumers’ vehicles age, the consumers’ willingness to pay higher prices decreases. We intend to be able to offer better value than the new car dealers to these more price-sensitive consumers. Monro’s service menu is focused on items that provide good purchase frequency, like oil changes and other scheduled services, along with higher value services like tires, brakes and other undercar services. These dynamics, combined with a declining number of service outlets and bays, are important traffic drivers for us as consumers go to outlets they trust to provide tires, maintenance, and repair services for their vehicles.

The continued shift from Do-It-Yourself to Do-It-For-Me is another favorable trend in our industry. The automotive aftermarket is estimated at approximately $287 billion in the U.S. and is primarily concentrated on the Do-It-For-Me channel, which represents about 80% of the market.⁸ There has been acceleration in the shift from Do-It-Yourself to Do-It-For-Me, and we expect that trend to continue with the increasing adoption of technology in new vehicles. As vehicles are becoming more technologically complex, we expect consumers will be less likely to be able to service their cars themselves, and instead will need to bring them to an automotive repair provider, such as Monro, to be serviced.

In addition, any meaningful shift to fully electric vehicles will create opportunities for expanded services to complement the tires, ride control and brake services that will still be required on those vehicles. Monro provides our technicians with the necessary training to remain on the cutting edge of these changes. However, these changes create challenges for smaller competitors, who will struggle to make the investments needed to keep up with the evolving marketplace.

We also believe that ride-sharing may provide increased opportunities for the automotive aftermarket. Individuals who provide ride-sharing services are likely to drive their vehicles more, therefore potentially needing their vehicles serviced more often by providers such as Monro. Additionally, while there is potential for fewer cars on the road due to these ride-sharing programs, this is not expected to have a near-term impact on our industry.

We believe Monro is well-positioned to capitalize on these long-term industry dynamics and favorable macro trends, which we expect will help position Monro to deliver consistent and sustainable organic growth.

In the near-term, the U.S. automotive aftermarket industry has been significantly impacted by the effects of COVID-19. On March 11, 2020, the World Health Organization (the "WHO") declared COVID-19 a pandemic. On March 13, 2020, the U.S. government declared a national emergency and U.S. state governments have declared states of emergency, as well. In response to the COVID-19 pandemic, many U.S. state governments, in states in which we operate, have taken preventative or protective actions, such as issuing stay-at-home orders and other social distancing measures. State and local governments have ordered temporary closures of some businesses and numerous other businesses have temporarily closed voluntarily. Further, individuals' ability to travel has been curtailed through mandated travel restrictions and may be further limited through additional voluntary or mandated closures of certain businesses. However, in our locations, the automotive undercar repair and tire sales and services industry has been classified as an essential business.

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1Vehicle Sales: Autos and Light Trucks, retrieved from U.S. Bureau of Economic Analysis: FRED, Federal Reserve Bank of St. Louis (“FRED Economic Data”), May 2020

2IHS Markit, report on Average Age of Cars and Light Trucks in U.S., June 2019 (“IHS Markit Data”)

3FRED Economic Data, Moving 12-Month Total Vehicle Miles Traveled, May 2020

4IHS Markit, report on U.S. Light Vehicles in Operation, accessed May 2018

5Ibid.

6IHS Markit Data, June 2019

7Ibid.

8Auto Care Association, Auto Care Factbook, accessed May 2018

While our industry is considered an essential business, state mandated shutdowns and stay-at-home orders enacted across the country impacted consumer demand and we experienced an immediate and significant decline in traffic during the fourth quarter of fiscal 2020, and this reduction in traffic has continued through the date of this report. In the macroeconomic environment, the impact of the pandemic has led to a significant increase in the U.S. unemployment rate, while decreasing new car sales and total miles driven. To the extent the pandemic is ongoing, we expect a continued negative impact of these factors, but we are unable to predict the duration and magnitude of the impact to our business. Once the pandemic subsides and government actions to curb the spread begin to abate, we believe consumers will drive more, supported by low gas prices, as well as the fact that they may be less willing to fly or take public transportation. Additionally, in a recessionary environment, consumers will be less likely to buy new cars and more likely to repair the existing cars they own. We believe this will continue to increase the average age of vehicles in operation.

MONRO.FORWARD STRATEGY

In October 2017, we completed a rigorous and comprehensive business assessment to identify areas of opportunity to improve in-store execution and the customer experience across our store base to drive higher traffic with a focus on overall customer lifetime value.

Based on these observations, we developed our strategic plan, called Monro.Forward, which is focused on four key pillars:

Improving the guest experience. The key focus areas of this initiative are improving our online reputation, delivering a consistent five-star experience to our customers in store, and refreshing our store appearance.

Enhancing our customer centric engagement. Supported by data-driven market strategies we are improving our customer retention and acquisition efforts, as well as building a true omni-channel presence.

Optimizing our product and service offering. Through this initiative, we are redefining our selling approach and optimizing our tire assortment both in-store and online.

Accelerating productivity and team engagement. By optimizing our store staffing model, creating a clearly defined career path, enhancing our training program and aligning our compensation we are driving to attain and retain quality talent.

We believe that these four key pillars, supported by investments in technology and data analytics, will create a scalable platform for sustainable growth over time.

In the long term, executing on accretive acquisition opportunities also remains a key element of our growth strategy. However, we have currently paused all acquisition activity due to the impact of the COVID-19 pandemic. Moving forward, and when we are able to better understand the impact of the COVID-19 pandemic, we will continue to effectively as well as efficiently acquire our targets using a data-driven, analytical approach. We have a robust pipeline and believe the fragmentation of our industry allows for many opportunities for consolidation. Using consumer demographic analytics, we are able to better identify targets that operate in the markets with favorable demographics and customer trends, allowing us to enter regions from which we are poised to benefit most. Additionally, to ensure we are capitalizing on these opportunities, we have added talent and structure to our mergers and acquisitions teams, who will work with our management team to ensure we capitalize on the momentum in the market. Finally, we believe the implementation of our Monro.Forward initiatives will allow us to more effectively integrate acquisitions and drive higher return on investment (“ROI”) going forward as we will have a more structured, consistent and effective business model.

In that regard, we have completed many acquisitions, including:

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(a)Table includes only acquisitions of five or more Company-operated stores for the five-year fiscal period ended March 28, 2020.

(b)Seven stores were subsequently closed due to redundancies or failure to achieve an acceptable level of profitability. See additional discussion under “Store Additions and Closings”.

(c)In this table, “Monro” refers to the name, not the corporation. Additionally, stores acquired from S&S Unlimited, Inc., Lloyd’s Tire Service, Inc., Nevada Tire Holdings, LLC and Idaho Tire Holdings, LLC have yet to be renamed, but are expected to begin operating under the Tire Choice name in fiscal 2021.

(d)One retread facility was also acquired and is operating under the McGee Tire name.

(e)Four wholesale locations were also acquired and are operating under the Tires Now name and one retread facility was also acquired and is operating under the Tire Choice name.

(f)One acquired store was never opened.

(g)Four wholesale locations and one retread facility were also acquired and are operating under the Tires Now and FreeService Tire names, respectively. (One wholesale location has since closed.)

(h)One distribution center was also acquired.

(i)One acquired store in Nevada is under construction and has yet to open. This store is expected to open in fiscal 2021.

STORE ADDITIONS AND CLOSINGS (a)

The following table shows the growth in the number of Company-operated stores over the last five fiscal years:

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(a)Table includes only Company-operated stores. No franchised, wholesale, retread or dealer locations are included.

(b)Generally, stores were closed because they failed to achieve or maintain an acceptable level of profitability or because a new company store was opened in the same market at a more favorable location.

(c)Includes 88 stores acquired in the fiscal 2020 Acquisitions. One additional store was acquired from Nevada Tire Holdings, LLC which was under construction at closing. This store is expected to open in fiscal 2021.

(d)Includes 51 stores acquired in the fiscal 2019 Acquisitions.

(e)Includes 45 stores acquired in the fiscal 2018 Acquisitions. (Excludes the UVR, Inc. store that was never opened.)

(f)Includes 90 stores acquired in the fiscal 2017 Acquisitions.

(g)Includes 40 stores acquired in the fiscal 2016 Acquisitions.

We currently expect to close 36 stores in fiscal 2021 that we concluded have failed to maintain an acceptable level of profitability.

We plan to add approximately 10 to 20 new greenfield stores in fiscal 2021 and to pursue appropriate acquisition candidates. Greenfield stores include new construction as well as the acquisition of one to four store operations.

Key factors in market and site selection for selecting new greenfield store locations include population, demographic characteristics, vehicle population and the intensity of competition. We partner with a customer analytics firm to provide market segmentation and demographic data specific to a geographic area in close proximity to a Monro location to identify high value lookalike customers and market directly to them. We attempt to cluster stores in market areas in order to achieve economies of scale in advertising, supervision and distribution costs. All new greenfield sites presently under consideration are within our established market areas.

As a result of extensive analysis of our historical and projected store opening strategy, we have established major market profiles, as defined by market awareness: mature, existing and new markets. Over the next several years, we expect to build or acquire stores in mature and existing markets in order to capitalize on our market presence and consumer awareness as well as grow in new markets through building and acquisitions. During fiscal 2020, 10 of the stores added (including acquired stores) were located in existing markets and 88 stores were added (including acquired stores) in new markets.

Monro has a chain-wide computerized inventory control and point-of-sale (“POS”) management information system, which has increased management's ability to monitor operations as the number of stores has grown. We have customized the POS system to specific service and tire store requirements and deploy the appropriate version in each type of store. The system includes the following:

Entry of a license plate and state automatically fills in vehicle identification number (“VIN”), year, make, and model. This provides accurate VIN, year, make, and model information while simplifying the estimate process at the store;

Online catalogs and online parts ordering directly with vendors;

Electronic mail and electronic cataloging, which allows store managers to electronically research the specific parts needed for the make and model of the car being serviced;

Electronic repair manuals that allow for instant access to a single source of accurate, up-to-date, original equipment manufacturer-direct diagnosis, repair and maintenance information;

Software which contains data that mirrors the scheduled maintenance requirements in vehicle owner’s manuals, specifically by make, model, year and mileage for every major automobile brand. Management believes that this software facilitates the presentation and sale of scheduled maintenance services to customers;

Streamlining of estimating and other processes;

Graphic catalogs;

A feature which facilitates tire searches by size;

Direct mail support;

Online appointment scheduling;

Customer service history;

A thermometer graphic which guides store managers on the profitability of each job;

The ability to view inventory of up to the closest 14 stores or warehouse; and

Expanded monitoring of price changes. This requires more specificity on the reason for a discount, which management believes helps to control discounting.

Enhancements will continue to be made to the POS system in an effort to increase efficiency, improve the quality and timeliness of store reporting and enable us to better serve our customers.

The financing to build a new greenfield service store location may be accomplished in one of three ways: (i) a store lease for the land and building (in which case, land and building costs will be financed primarily by the lessor), (ii) a land lease with the building constructed by Monro (with building costs paid by Monro), or (iii) a land purchase with the building constructed by Monro. In all three cases, for service stores, each new store also will require approximately $225,000 for equipment (including a POS system and a truck) and approximately $95,000 in inventory. Because we generally do not extend credit to most customers, stores generate almost no receivables and a new store's actual net working capital investment is nominal. Total capital required to build a new greenfield service store ranges, on average, from $360,000 to $990,000 depending on the location and which of the three financing methods is used. In general, tire stores are larger and have more service bays than Monro’s traditional service stores and, as a result, construction costs are at the high end of the range of new store construction costs. Total capital required to build a new greenfield tire (land and building leased) location costs, on average, approximately $600,000, including $250,000 for equipment and $130,000 for inventory. In instances where we acquire an existing business, we may pay additional amounts for intangible assets such as customer lists, covenants not-to-compete, trade names and goodwill, but generally will pay less per bay for equipment and real property.

At March 28, 2020, we leased the land and/or the building at approximately 74% of our store locations and owned the land and building at the remaining locations. Monro's policy is to situate new stores in the best locations, without regard to the form of ownership required to develop the locations.

New service and tire stores, (excluding acquired stores), have average sales of approximately $450,000 and $1,050,000, respectively, in their first 12 months of operation, or $77,000 and $150,000, respectively, per bay.

STORE OPERATIONS

Store Format

As part of Monro.Forward, one of our largest initiatives is to improve our customers’ in-store experience. This initiative is twofold and includes the implementation of standardized in-store operating procedures, followed by reimaging stores to create a more consistent appearance. Through these efforts, we have taken major steps to improve our customers' in-store experience and help ensure that we deliver a 5-star experience at each of our store locations.

We have taken an education-centered approach to the in-store customer selling process and trained our teams to execute our standardized procedures, which we call our Monro Playbook, to drive consistency across all locations. Our Monro Playbook includes clearly defined roles and responsibilities for our employees with a focus on service quality. We expect that this clear and consistent selling approach, coupled with our stronger merchandise strategy, will be instrumental in driving higher in-store conversion. To complement our Monro Playbook, we also established clear brand standards to align the appearance of our stores and further drive consistency across our store base that currently includes a wide range of stores and formats. We determine the appropriate scope of refresh needed for each of our stores by examining their age, size and market demographics to ensure we are investing the appropriate amount of capital to achieve the highest possible returns.

During fiscal 2019, we reached a significant milestone in this initiative by completing our pilot initiative of 30 stores in Rochester, NY. During fiscal 2020, we completed the roll out of our brand operational standards and the store modernization of 175 additional stores. We have currently suspended all capital expenditures related to the roll out of our brand operational standards and store modernization initiatives due to the impact of the COVID-19 pandemic. When we are able to better understand the impact of the COVID-19 pandemic, we plan to continue the roll out of our brand operational standards across our store base and modernize our remaining store portfolio, which we estimate will take two to four years.

To drive improved consistency across our store base, we also implemented tablet-based dashboards and a cloud-based standardized store review process. Our tablets and dashboards allow our store operation leaders to more effectively evaluate and manage each store's performance across numerous key performance indicators, including customer satisfaction and online reviews, traffic and sales trends by category, margin performance and staffing and labor metrics. Managers have the ability to track these metrics versus historical trends and their peers, with the information flowing to them in near real time.

Our store review process now is standardized across all districts in the Company and will drive increased visibility into the field. This standardized store review process allows us to take both a quantitative and qualitative approach to assessing our store performance, evaluating each store regularly on 135 points across five areas ranging from store appearance to operational performance. Overall, we believe our data-driven approach and related investments in technology will drive efficiency in our stores and our field management organization, reducing the time that they spend identifying underlying causes of performance issues and allowing them to prioritize their time and attention to coach our store teams on improving their results. The cloud-based systems will also increase the transparency and accountability throughout our organization and drive consistent improvement in execution across all of our stores.

The typical format for a Monro store is a free-standing building consisting of a sales area, fully-equipped service bays and a parts/tires storage area. Most service bays are equipped with above-ground electric vehicle lifts. Generally, each store is located within 25 miles of a “key” store which carries approximately double the inventory of a typical store and serves as a mini-distribution point for slower moving inventory for other stores in its area. Individual store sizes, number of bays and stocking levels vary greatly, even within the service and tire store groups, and are dependent primarily on the availability of suitable store locations, population, demographics and intensity of competition among other factors. (See additional discussion under “Store Additions and Closings”.) A summary of average store data for service and tire stores is presented below:

Data for the Tire Warehouse and Tire Barn Warehouse stores has been excluded because these locations primarily install new tires and wheels and many perform alignments. Additionally, most Tire Warehouse stores have one indoor service bay to perform alignments. The store building houses a waiting room, storage area and an area to mount and balance tires on the car’s wheels once the wheels and tires have been removed from the car. Removal of old tires and wheels from, and installation of new tires and wheels on, customers’ cars are performed outdoors under a carport. The average inventory carried by the Tire Warehouse and Tire Barn Warehouse stores is $246,000 per store.

Stores generally are situated in high-visibility locations in suburban areas, major metropolitan areas or small towns and offer easy customer access. The typical store is open from 7:30 a.m. to 7:00 p.m. on Monday through Friday and from 7:30 a.m. to 6:00 p.m. on Saturday. A majority of store locations are also open Sundays from 9:00 a.m. to 5:00 p.m. Our stores are currently operating on a reduced schedule in response to the COVID-19 pandemic. When we are able to better understand the impact of the COVID-19 pandemic, we plan to operate our stores on a more normalized schedule prior to the schedule reduction.

Inventory Control and Management Information System

All Company stores communicate daily with the corporate headquarters and warehouse by computerized inventory control and electronic POS management information systems, which enable us to collect sales and operational data on a daily basis, to adjust store pricing to reflect local conditions and to control inventory on a near real-time basis. Additionally, each store has access, through the POS system, to the inventory carried by up to the 14 stores or warehouse nearest to it. Management believes that this feature improves customer satisfaction and store productivity by reducing the time required to locate out-of-stock parts and tires. It also improves profitability because it reduces the amount of inventory which must be purchased outside Monro from local vendors.

Quality Control and Warranties

To maintain quality control, we conduct audits to rate our employees' telephone sales manner and the accuracy of pricing information given.

We have a customer review and survey program to monitor customer attitudes toward service quality, friendliness, speed of service, and overall customer experience for each store. Customer concerns are addressed by customer service and field management personnel.

Monro uses a “Double Check for Accuracy Program” as part of our routine store procedures. This quality assurance program requires that a technician and supervisory-level employee independently inspect a customer’s vehicle, diagnose and document the necessary repairs, and agree on an estimate before presenting it to a customer. This process is formally documented on the written estimate by store personnel.

We are an active member of the Automotive Maintenance & Repair Association (“AMRA”). AMRA is an organization of automotive retailers, wholesalers and manufacturers which was established as part of an industry-wide effort to address the ethics and business practices of companies in the automotive repair industry through the Motorist Assurance Program (“MAP”). Participating companies commit to improving consumer confidence and trust in the automotive repair industry by adopting “Uniform Inspection Communication Standards” (“UICS”) established by MAP. These UICS are available in our stores and serve to provide consistent recommendations to customers in the diagnosis and repair of a vehicle.

We offer limited warranties on substantially all of the products and services that we provide. We believe that these warranties are competitive with industry practices and serve as a marketing tool to increase repeat business at our stores.

Store Personnel and Training

Monro supervises store operations primarily through our Regional Vice Presidents who oversee Zone Managers who, in turn, oversee District Managers. The typical service store is staffed by a Store Manager and four to six technicians, one of whom serves as the Assistant Manager. The typical tire store, except Tire Warehouse and Tire Barn stores, is staffed by a Store Manager, an Assistant Manager and/or Service Manager, and four to eight technicians. Larger volume service and tire stores may also have one or two sales people. The higher staffing level at many tire stores is necessary to support their higher sales volume. Tire Warehouse and Tire Barn stores are generally staffed by a Store Manager and two to four technicians, one of whom serves as the Assistant Manager. All Store Managers and Assistant Managers receive either hourly or salaried compensation. Due to the impact of the COVID-19 pandemic, we have reduced staffing to match lower demand.

We believe that the ability to recruit and retain qualified technicians is an important competitive factor in the automotive repair industry, which has historically experienced a high turnover rate. As part of our Monro.Forward strategy, we are creating a clearly defined career path and enhanced training program to attract, develop and retain our talent.

During fiscal 2019, we also optimized our store staffing model by rightsizing our overstaffed and understaffed stores. As a next step, we expect to implement during fiscal 2021 a cloud-based data-driven store staffing and scheduling system to drive further staffing efficiency by more accurately re-balancing the level of technical skills in each store, ensuring our stores are staffed with technicians who have the right skill levels based on sales and volume mix as well as that store's growth potential.

To attract the right talent and build the best team in the aftermarket auto industry, we are focused on providing our people with the right training to optimize their performance. To accomplish this, we substantially implemented during fiscal 2020 a cloud-based curriculum called Monro University. We believe this curriculum provides our employees with the technical training needed to effectively serve our customers today and prepare them to handle future technician requirements as vehicles become more complex with the increased adoption of technology.

In addition to Monro University, our training department develops and coordinates technical training courses on critical areas of automotive repair to Monro technicians (e.g. Antilock braking systems (“ABS”) brake repair, drivability, tire pressure monitoring system (“TPMS”), etc.) and also conducts required technical training to maintain compliance with state inspection licenses, where applicable, and AMRA/MAP accreditation. Additionally, our training department holds periodic field technical clinics for store personnel and coordinates technician attendance at technical clinics offered by our vendors. We have electronic repair manuals installed in all of our stores for daily reference. We also issue technical bulletins to all stores on innovative or complex repair processes, and maintain a centralized database for technical repair problems. In addition, Monro has established a telephone technical help line to provide assistance to store personnel in resolving problems encountered while diagnosing and repairing vehicles. The help line is available during all hours of store operation. A comprehensive set of on-line courses in automotive repair and tire service is made available for our technicians to participate in at no cost.

Many of our new technicians join the Company in their early twenties as trainees or apprentices. As they progress, many are promoted to technician and eventually master technician, the latter requiring Automotive Service Excellence (“ASE”) certification in eight different categories. We offer free online ASE certification preparation courses and will reimburse technicians for the cost of ASE certification registration fees and test fees. We also offer a tool purchase program through which trainee technicians can acquire their own set of tools.

Our training program provides multiple training sessions to both Store Managers and technicians in each store, each year.

Management training courses developed by our training department and operations management are provided through Monro University, and are supplemented with live and on-line vendor training courses. Management training covers safety, customer service, sales, human resources (counseling, recruiting, interviewing, etc.), leadership, scheduling, financial and operational areas, and is delivered on a regular basis. We believe that involving operations management in the development and delivery of these sessions results in more relevant and actionable training for Store Managers, and helps to improve overall performance and staff retention.

Monro also maintains an employee website that contains many resources for both managers and technicians to reference including Human Resource information and forms. Additionally, there is a Facilities section containing important environmental and equipment information, as well as Store Manager and Technician sections that contain other training programs, including on-line training videos, and documents specific for both managers and technicians.

We also expect to drive higher retention by providing more transparency into career opportunities and to aid our employees in charting their own course towards advancement. This is further supported by annual reviews with employees to align their own developmental objectives with our desired business objectives. Further, we ensure our incentives are tightly connected to desired performance. While our previous compensation model was based solely on profitability, our new compensation model is based on a balanced scorecard that rewards same-store sales growth, profitability and traffic. The incentives are designed to increase as the employees' performance improves with maximum payouts for outstanding performance. This new compensation plan also streamlines all previous bonus programs, creating consistency and providing us the ability to use labor more productively across our stores and districts.

OPERATIONS

Monro provides our customers with a wide range of dependable, high-quality tire and automotive services at a competitive price by emphasizing the following key elements.

Products and Services

The typical store provides a full range of undercar repair services for brakes, steering, mufflers and exhaust systems, drive train, suspension and wheel alignment, as well as tire replacement and service. These services apply to all makes and models of domestic and foreign cars, light trucks and vans. During fiscal 2018, we conducted a comprehensive analysis of our product and service offerings to develop a clearly defined merchandise strategy. As a result of this analysis, we launched Good, Better, Best service packages during the first quarter of fiscal 2019 to provide customers with clear options to choose the right services for their vehicle. Offering several options keeps the customer education and in-store selling process simple and gives our employees the opportunity to trade customers up to higher-value packages and increase attachment sales. Additionally, we launched the pilot phase of our tire category and pricing system in a number of our markets during the fourth quarter of fiscal 2020. This new tool will allow us to dynamically track demand trends and make rapid adjustments to optimize our tire assortment by leveraging the breadth of our tire brand portfolio to offer the right tires at the right price points. We see potential in leveraging data analytics to align our tire inventory assortment with consumer demographics, so that we can drive long-term margin expansion in our largest category by providing the right-size tire inventory for the vehicle population surrounding our stores.

As a percentage of sales, the service stores provide significantly more brake and maintenance services than tire stores, and tire stores provide substantially more tire replacement and related services than service stores.

Stores generally provide many of the routine maintenance services (except engine diagnostic), which automobile manufacturers suggest or require in the vehicle owner’s manuals, and which fulfill manufacturers’ requirements for new car warranty compliance. We offer "Scheduled Maintenance" services in our stores whereby the aforementioned services are packaged and offered to consumers based upon the year, make, model and mileage of each specific vehicle. Management believes that we offer this service in a more convenient and cost competitive fashion than auto dealers can provide.

Included in maintenance services are oil change services, heating and cooling system "flush and fill" service, belt installation, fuel system service and a transmission "flush and fill" service. Additionally, most stores replace and service batteries, starters and alternators. Stores in certain states also perform annual state inspections. Additionally, approximately 74% of our stores offer air conditioning services.

The format of the Tire Warehouse and Tire Barn Warehouse stores are slightly different from Monro’s typical service or tire stores (as described above) in that, generally, over 92% of the stores’ sales involve tire services, including the mounting and balancing of tires, and the sale of road hazard warranties. Most of these stores also provide the installation of wiper blades. Currently, 80% of Tire Warehouse and 90% of Tire Barn Warehouse stores perform alignments.

Customer Satisfaction

As part of our Monro.Forward strategy, we have fundamentally changed our culture from a transaction-focused business to one that is built on long-term customer relationships. To achieve this goal, we launched a new technology-supported customer satisfaction and online review management system during the fourth quarter of fiscal 2018. We are using this technology to help us solicit feedback from our customers across all major areas of their brand experience. Additionally, we leverage our online reviews to learn more about what our customers want and need, and how we can always deliver a 5-star experience to them. Utilizing the insights from these investments, we are making improvements to our store operations, which in turn are leading to a material improvement in Monro's overall star rating across online review sites. As of March 28, 2020, we have an all-time high average Company rating of 4.6 stars across our 1,283 locations. Equally important, we believe improved customer experience is a virtuous cycle, as it leads to improved online ratings that drive better visibility online, which in turn leads to increased conversion and ultimately higher potential traffic to our stores.

Competitive Pricing, Advertising and Co-branding Initiatives

Monro seeks to set competitive prices for quality services and products. We support our pricing strategy with special offers and coupons distributed through a variety of channels including: direct mail, e-mail, digital advertising, fliers, promotional store signage and in-store displays. In addition, to increase consumer awareness of the services we offer, Monro has a presence in traditional and digital radio, billboards and relevant directories. We are concentrating our marketing efforts in high ROI channels, with an emphasis on the digital environment. Our digital marketing efforts include paid and organic search on all major search engines. On-line reviews are obtained from various review sites, including Google and Facebook. Our review star rating has increased to an all-time high of 4.6 as of March 28, 2020. Digital advertising also includes search remarketing and banner and mobile advertising. We also manage social media profiles on a variety of platforms. We leverage customer relationship marketing and data analytics to reach our customers where they are and deliver tailored messages based on our customer specific vehicle needs. Due to the impact of the COVID-19 pandemic, we have reduced advertising spend. When we are able to better understand the impact of the COVID-19 pandemic, we plan to adjust advertising to a more normalized level.

We are committed to building an omni-channel presence to create a seamless buying experience for our customers. During the second quarter of fiscal 2019, we launched modernized retail and corporate websites, the first phase of this initiative and a major milestone in the development of our online presence. Our primary websites include www.monro.com, www.mrtire.com, www.tqtire.com, www.autotire.com, www.tirewarehouse.net, www.kentowery.com, www.tirebarn.com, www.thetirechoice.com, www.carx.com and www.tiresnowonline.com. With responsive optimized design for mobile users, a streamlined tire search and improved content and functionality, our new retail websites better position us to address our customers’ needs. These websites help customers search for store locations, print coupons, make service appointments, shop for tires and access information on our services and products, as well as car care tips. Importantly, they better showcase the solutions we provide to our customers, including our Good, Better, Best product and service packages.

Our corporate website is www.corporate.monro.com, which provides detailed information regarding Monro’s vision, values, leadership and financial performance. Information available on our website and the websites listed above is not part of, and is not incorporated into, this Annual Report on Form 10-K.

Centralized Control

While we both operate and franchise stores, we believe that direct operation of stores enhances our ability to compete by providing centralized control of such areas of operations as service quality, store appearance, promotional activity and pricing. We also believe our experience in operating stores makes us a more valuable partner to our franchisees. A high level of competence is maintained throughout the Company, as we require as a condition of employment, that employees participate in periodic training programs, including sales, management, customer service and changes in automotive technology. Additionally, purchasing, distribution, merchandising, advertising, accounting and other store support functions are centralized primarily in Monro's corporate headquarters in Rochester, New York and are provided through our subsidiary, Monro Service Corporation. The centralization of these functions results in efficiencies and gives management the ability to closely monitor and control costs.

PURCHASING AND DISTRIBUTION

Through our wholly-owned subsidiary, Monro Service Corporation, we select and purchase tires, parts and supplies for all Company-operated stores on a centralized basis through an automatic replenishment system. Although purchases outside the centralized system are made when needed at the store level, these purchases are low by industry standards and accounted for approximately 19% of all parts and tires used in fiscal 2020.

Our ten largest vendors accounted for approximately 84% of our total stocking purchases, with the largest vendor accounting for approximately 28% of total stocking purchases in fiscal 2020. In fiscal 2020, Monro imported approximately 25% of our parts (excluding batteries, oil and supplies) and tire purchases. We purchase parts, oil and tires from approximately 120 vendors. Management believes that our relationships with vendors are excellent and that alternative sources of supply exist, at comparable cost, for substantially all parts used in our business. We routinely obtain bids from vendors to ensure we are receiving competitive pricing and terms.

Amid global tariffs, market uncertainty (including the impact from the COVID-19 pandemic) and other material cost pressures, our vertically-integrated and diversified supply chain continues to drive our cost leadership position and remains a key differentiator in our industry.

Most parts are shipped by vendors to our warehouse facilities and are distributed to stores by the Monro-operated tractor/trailer fleet. The majority of tires are shipped to our stores directly by vendors pursuant to orders placed by our headquarters staff. Stores are replenished at least bi-weekly, and such replenishment fills, on average, 92% of all items ordered by the stores' automatic POS-driven replenishment system. Monro operates warehouses in California, Kentucky, Maryland, New Hampshire, New York, North Carolina, South Carolina, Tennessee and Virginia. These warehouses each carry, on average, approximately 2,500 SKUs.

We enter into contracts with certain parts and tire suppliers, some of which require us to buy (at market competitive prices) up to 100% of our annual purchases of specific products. These agreements expire at various dates. We believe these agreements provide us with high quality, branded merchandise at preferred pricing, along with strong marketing and training support.

COMPETITION

Monro competes in the automotive service and tire industry. This industry is generally highly competitive and fragmented, and the number, size and strength of competitors vary widely from region to region. We believe that competition in this industry is based on customer service and reputation, store location, name awareness and price. Monro's primary competitors include national and regional undercar, tire specialty and general automotive service chains, both franchised and company-operated; car dealerships, mass merchandisers’ operating service centers; and, to a lesser extent, gas stations, independent garages and Internet tire sellers. Monro considers TBC Corporation (operating primarily under the NTB, Midas and Tire Kingdom brands), Firestone Complete Auto Care service stores, The Pep Boys – Manny, Moe and Jack service stores, Meineke, and Mavis Discount Tire to be direct competitors. In most of the new markets that we have entered, at least one competitor was already present. In identifying new markets, we analyze, among other factors, the intensity of competition. (See "Monro.Forward Strategy” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations".)

EMPLOYEES

As of March 28, 2020, Monro had 8,184 employees, of whom 7,595 were employed in the field organization, 261 were employed at the warehouses, 272 were employed at our corporate headquarters and 56 were employed in other offices. Monro's employees are not members of any union. Due to the impact of the COVID-19 pandemic, we have reduced our workforce through furlough or other reduction. When we are able to better understand the impact of the COVID-19 pandemic, we plan to adjust our workforce to meet demand.

Our strong commitment to support our teammates' professional development and the cultural changes we have made across the organization have had a tremendous impact on our ability to retain talent, as evidenced by our quarterly turnover reaching its lowest level in the fourth quarter of fiscal 2020 since the fourth quarter of fiscal 2015, continuing a trend we observed in the fourth quarter of fiscal 2019. We have received strong positive feedback from our employees supporting our Monro.Forward initiatives and the actions we are taking to better serve our customers.

REGULATION

We are subject to various federal, state and local laws and governmental regulations relating to the operation of our business, including, among other things, those regarding employment and labor practices, workplace safety, zoning and the handling, storage and disposal of hazardous substances contained in the products that we sell and use in our service bays, the recycling of batteries, tires and used lubricants, and the ownership and operation of real property. We maintain programs to facilitate compliance with these laws and regulations. We believe that we are in compliance with all applicable environmental and other laws and regulations, and our related compliance costs are not material.

Monro stores new oil and recycled antifreeze and generates and/or handles used tires and automotive oils, antifreeze and certain solvents, which are disposed of by licensed third-party contractors. In certain states, as required, we also recycle oil filters. Accordingly, we are subject to numerous federal, state and local environmental laws including the Comprehensive Environmental Response Compensation and Liability Act (“CERCLA”). In addition, the United States Environmental Protection Agency (the "EPA"), under the Resource Conservation and Recovery Act ("RCRA"), as well as various state and local environmental protection agencies, regulate our handling and disposal of certain waste products and other materials. The EPA, under the Clean Air Act, also regulates the installation of catalytic converters by periodically spot checking repair jobs, and may impose sanctions, including but not limited to civil penalties up to $37,500 per violation (or up to $37,500 per day for certain willful violations or failures to cooperate with authorities), for violations of RCRA and the Clean Air Act.

Monro strives to maintain an environmentally and socially conscious corporate culture, giving back our time, talent and financial resources however we can. This is demonstrated by our recycling policies at our offices, warehouses and stores and our support of charitable organizations dedicated to caring for the communities and neighborhoods we serve. In fiscal 2020, Monro recycled approximately 3.2 million gallons of oil and 3.9 million tires, as well as approximately 87,000 vehicle batteries and 850 tons of cardboard, all as part of our commitment to the environment. Further, Monro and its employees donated to a number of charities during fiscal 2020, including over $230,000 to the United Way. The United Way, which directly improves lives by mobilizing people and resources to advance the common good, has always been our primary charitable focus. The Company and employees participate in the annual United Way campaign in Rochester, NY, our corporate headquarters, as well as in many other communities where we do business.

SEASONALITY

Although our business is not highly seasonal, customers do purchase more undercar service during the period of March through October than the period of November through February, when miles driven tend to be lower. In the tire stores, the better sales months are typically May through August, and October through December. The slowest months are typically January through April and September. As a result, profitability is typically lower during slower sales months, or months where mix is more heavily weighted toward tires, which is a lower margin category. Additionally, since our stores are primarily located in the northeastern and midwestern United States, profitability tends to be lower in the winter months when certain costs, such as utilities and snow plowing, are typically higher.

COMPANY INFORMATION AND SEC FILINGS

Monro maintains a website at www.corporate.monro.com and makes its annual, quarterly and periodic Securities and Exchange Commission (“SEC”) filings available through the Investors section of that website. Monro’s SEC filings are available through this website free of charge, via a direct link to the SEC website at www.sec.gov.

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Item 1A. Risk Factors

In addition to the risks discussed elsewhere in this annual report, the following are the important factors that could cause Monro’s actual results to differ materially from those projected in any forward looking statements:

Matters related to the COVID-19 pandemic have and will continue to significantly and adversely impact our business, financial position, results of operations and cash flows.

The spread of COVID-19 has created a global public health crisis that has resulted in widespread volatility and deteriorations in household, business, economic and market conditions. We have experienced negative impacts to demand for our products and services from the COVID-19 pandemic, which is adversely affecting our results of operations, and we have also experienced significant disruption to our normal business operations and planned implementation of certain strategic initiatives.

Our business will continue to be affected by the broader economic effects from the COVID-19 and related regulatory actions, including customer demand for our products. While we have so far been able to source required materials and products at reasonable cost, the pandemic may also affect our supply chain in ways that are beyond our control. We may also incur costs or experience further disruption to comply with new or changing regulations in response to the pandemic.

The overall magnitude of the COVID-19 pandemic, including the extent of its direct and indirect impact on our business, financial position, results of operations or liquidity is inherently uncertain due to the rapid development and fluidity of the situation. Further, the ultimate impact of the COVID-19 pandemic depends on many factors that are not within our control, including, but not limited to: governmental, business and individuals' actions that have been and continue to be taken in response to the COVID-19 pandemic; the severity and duration of outbreaks of the virus; the impact of the COVID-19 pandemic and actions taken in response on global and regional economies, travel, and economic activity; the availability of federal, state, local or non-U.S. funding programs; general economic uncertainty in key global markets and financial market volatility; global economic conditions and levels of economic growth; and the pace of recovery, particularly in our markets, when the COVID-19 pandemic subsides.

In addition, preparing for and responding to the continuing pandemic could divert management’s attention from our key strategic priorities, increase costs as we prioritize health and safety matters for our teammates and customers, cause us to reduce, delay, alter or abandon initiatives that may otherwise increase our long-term value, increase vulnerability to information technology or cybersecurity related risks as certain of our teammates work remotely and otherwise continue to disrupt our business operations.

We are unable to estimate the impact of COVID-19 with certainty on our business and operations at this time. The pandemic could cause us to experience impairment of our goodwill and other financial assets, further reduce demand for our products and services and other adverse impacts on our financial position, results of operations and cash flows.

Sustained adverse effects may also prevent us from satisfying financial covenants in our credit agreement or result in downgrades in our credit ratings.

We operate in the highly competitive automotive repair industry.

The automotive repair industry in which we operate is generally highly competitive and fragmented, and the number, size and strength of our competitors vary widely from region to region. We believe that competition in the industry is based primarily on customer service, reputation, store location, name awareness and price. Our primary competitors include national and regional undercar, tire specialty and general automotive service chains, both franchised and company-operated, car dealerships, mass merchandisers operating service centers and, to a lesser extent, gas stations, independent garages and Internet tire sellers. Some of our competitors have greater financial resources, are more geographically diverse and have better name recognition than we do, which might place us at a competitive disadvantage to those competitors. Because we seek to offer competitive prices, if our competitors reduce prices, we may be forced to reduce our prices, which could have a material adverse effect on our business, financial condition and results of operations. Further, our success within this industry also depends upon our ability to respond in a timely manner to changes in customer demands for both products and services. We cannot assure that we, or any of our stores, will be able to compete effectively. If we are unable to compete successfully in new and existing markets, we may not achieve our projected revenue and profitability targets.

We are subject to seasonality and cycles in the general economy and customers’ use of vehicles, which may impact demand for our products and services.

Although our business is not highly seasonal, our customers typically purchase more undercar services during the period of March through October than the period of November through February, when miles driven tend to be lower. Further, customers may defer or forego vehicle maintenance at any time during periods of inclement weather. In the tire stores, the better sales months are typically May through August, and October through December. The slowest months are typically January through April and

September. As a result, profitability is typically lower during slower sales months or months where mix is more heavily weighted toward tires, which is a lower margin category.

Additionally, for our stores located in the northeastern and midwestern United States, profitability tends to be lower in the winter months when certain costs, such as utilities and snow plowing, are typically higher. Sales can also be volatile in these areas in reaction to warm weather in winter months or severe weather, which can result in store closures.

We purchase products such as oil and tires, which are subject to cost variations related to commodity costs. If we cannot pass along cost increases, our profitability would be negatively impacted.

Further, our industry is influenced by the number of miles driven by automobile owners. Factors that may cause the number of miles driven by automobile owners to decrease include the weather, travel patterns, gas prices and fluctuations in the general economy. For example, as a result of the COVID-19 pandemic, there has recently been a marked decrease in the number of miles driven by automobile owners due to the various stay-at-home orders across the regions in which we operate. As a result of this reduction in the number of miles driven by automobile owners, there has been a negative effect on the demand for our products and services. As another example, when the retail cost of gasoline increases, the number of miles driven by automobile owners may decrease, which could result in less frequent service intervals and fewer repairs. Although the recent retail cost of gasoline has generally decreased as a result of the reduced number of miles driven by automobile owners, the volatile general economic conditions as well as the impact of the stay-at-home orders are expected to result in less frequent service intervals and fewer repairs. Accordingly, continued significant reduction in the number of miles driven by automobile owners will have a material adverse effect on our business and results of operations.

Changes in economic conditions that impact consumer spending could harm our business.

The automotive repair industry and our financial performance are sensitive to changes in overall economic conditions that impact consumer spending, including the current economic volatility resulting from the COVID-19 pandemic. Future economic conditions affecting consumer income such as employment levels, business conditions, interest rates, and tax rates could reduce consumer spending or cause consumers to shift their spending to other products. During periods of good economic conditions, consumers may decide to purchase new vehicles rather than servicing their older vehicles. A general reduction in the level of consumer spending or shifts in consumer spending to other services could have a material adverse effect on our growth, sales and profitability.

Changes in the U.S. trade environment, including the imposition of import tariffs, could adversely affect our consolidated results of operations and cash flows.

Beginning in 2018, the U.S. government imposed new or higher tariffs on specified imported products originating from China in response to what it characterizes as unfair trade practices, and China responded by imposing new or higher tariffs on specified products imported from the United States. Simultaneously, the U.S. government imposed imported steel and aluminum tariffs in response to national security concerns and several countries retaliated by proposing or imposing new tariffs on specified products imported from the United States, with expansions on such tariffs as recently as early 2020. Trade tensions with China have increased as the U.S. government has implemented and proposed additional tariffs and the Chinese government proposed retaliatory tariffs.

Although we have no foreign operations and do not manufacture any products, tariffs imposed on products that we sell, such as tires, may cause our expenses to increase, which could adversely affect our profitability unless we are able to raise our prices for these products. If we increase the price of products impacted by tariffs, our service offerings may become less attractive relative to services offered by our competitors or cause our customers to delay needed maintenance. Given the uncertainty regarding the scope and duration of these trade actions by the U.S. or other countries, the impact of these trade actions on our operations or results remains uncertain. However, the tariffs, along with any additional tariffs or retaliatory trade restrictions implemented by other countries, could adversely affect the operating profits of our business, which could have an adverse effect on our consolidated results of operations and cash flows.

We depend on our relationships with our vendors, including foreign sources, for certain inventory. Our business may be negatively affected by the risks associated with such relationships and international trade.

We depend on close relationships with our vendors for parts, tires and supplies and for our ability to purchase products at competitive prices and terms. Our ability to purchase at competitive prices and terms results from the volume of our purchases from these vendors. We have entered into various contracts with parts suppliers that require us to buy from them (at market competitive prices) up to 100% of our annual purchases of specific products. These agreements expire at various dates.

We believe that alternative sources exist for most of the products we sell or use at our stores, and we would not expect the loss of any one supplier to have a material adverse effect on our business, financial condition or results of operations. Due to the COVID-19 pandemic, our suppliers may experience shortages of the products we purchase resulting in interruptions to our supply chains. If any of our suppliers do not perform adequately or otherwise fail to distribute parts or other supplies to our stores, our inability to replace

the suppliers in a timely manner and on acceptable terms could increase our costs and could cause shortages or interruptions that could have a material adverse effect on our business, financial condition and results of operations.

In addition, we depend on a number of products (e.g. brake parts, tires, oil filters) produced in foreign markets. The U.S. government has made proposals and taken actions intended to address trade imbalances, which include encouraging increased production in the United States. These proposals could result in increased customs duties and the renegotiation of certain U.S. trade agreements, which in turn could cause an increase in the prices we pay for certain of the products we sell. Any changes in U.S. trade policies, or uncertainty with respect to the future of U.S. trade policies, resulting in increased costs which we are not able to offset with pricing increases of our own could adversely affect our financial performance.

We also face other risks associated with the delivery of inventory originating outside the United States, including:

potential economic and political instability in countries where our suppliers are located;

increases in shipping costs;

transportation delays and interruptions, including those occurring as a result of the COVID-19 pandemic;

compliance with the United States Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or making other prohibited payments to foreign officials; and

significant fluctuations in exchange rates between the U.S. dollar and foreign currencies.

Our industry is subject to environmental, consumer protection and other regulation.

We are subject to various federal, state and local environmental laws, building and zoning requirements, employment and labor laws and other governmental regulations regarding the operation of our business. For example, we are subject to rules governing the handling, storage and disposal of hazardous substances contained in some of the products such as motor oil that we sell and use at our stores, the recycling of batteries, tires and used lubricants, and the ownership and operation of real property. These laws and regulations can impose fines and criminal sanctions for violations as well as require the installation of pollution control equipment or operational changes to decrease the likelihood of accidental hazardous substance releases. Accordingly, we could become subject to material liabilities relating to the investigation and cleanup of contaminated properties, and to claims alleging personal injury or property damage as a result of exposure to, or release of, hazardous substances. In addition, stricter interpretation of existing laws and regulations, new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require us to incur costs or become the basis of new or increased liabilities that could have a material adverse effect on our business, financial condition and results of operations.

National automotive repair chains have also been the subject of investigations and reports by consumer protection agencies and the Attorneys General of various states. Publicity in connection with these kinds of investigations could have an adverse effect on our sales and, consequently, our business, financial condition and results of operations. State and local governments have also enacted numerous consumer protection laws with which we must comply.

The costs of operating our stores may increase if there are changes in laws governing minimum hourly wages, working conditions, overtime, workers’ compensation and health insurance rates, unemployment tax rates or other laws and regulations. A material increase in these costs that we were unable to offset by increasing our prices or by other means could have a material adverse effect on our business, financial condition and results of operations.

We are involved in litigation from time to time arising from the operation of our business and, as such, we could incur substantial judgments, fines, legal fees or other costs.

We are sometimes the subject of complaints or litigation from customers, employees or other third parties for various actions. From time to time, we are involved in litigation involving claims related to, among other things, breach of contract, negligence, tortious conduct and employment and labor law matters, including payment of wages. We may also face claims related to the COVID-19 pandemic, including claims from employees or customers who contract COVID-19 at our stores or offices. The damages sought against us in some of these litigation proceedings could be substantial. Although we maintain liability insurance for some litigation claims, if one or more of the claims were to greatly exceed our insurance coverage limits or if our insurance policies do not cover a claim, this could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Business interruptions may negatively impact our store operations, availability of products and/or the operability of our computer systems, which may have a material negative effect on our business and results of operations. A breach of our computer systems could damage our reputation and have a material adverse effect on our business and results of operations.

If any of our locations in a particular region are unexpectedly closed permanently or for a period of time, it could have a negative impact on our business. Such closures could occur as a result of circumstances out of our control, including war, acts of terrorism, global health crises, extreme weather conditions and other natural disasters. Further, if our ability to obtain products and merchandise for use in our stores is impeded, it could have a negative impact on our business. Factors that could negatively affect our ability to obtain products and merchandise include the sudden inability to import goods into the United States for any reason and the curtailment or delay of commercial transportation. While we do maintain business interruption insurance, there is no guarantee that we will be able to use such insurance for any particular location closure or other interruption in operations.

Additionally, given the number of individual transactions we process each year, it is critical that we maintain uninterrupted operation of our computer and communications hardware and software systems. Our systems could be subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, including breaches of our transaction processing or other systems that result in the compromise of confidential customer data, catastrophic events such as fires, tornadoes and hurricanes, and usage errors by our employees. If our systems are breached, damaged or cease to function properly, we may have to make a significant investment to fix or replace them, we may suffer interruptions in our operations in the interim, we may face costly litigation, and our reputation with our customers may be harmed. The risk of disruption is increased in periods where complex and significant systems changes are undertaken. Any material interruption in our computer operations may have a material adverse effect on our business or results of operations.

If we experience a data security breach and confidential customer or employee information is disclosed, we may be subject to penalties and experience negative publicity, which could affect our customer relationships and have a material adverse effect on our business. We may incur increasing costs in an effort to minimize these cyber security risks.

The nature of our business involves the receipt and storage of personally identifiable data of our customers and employees. This type of data is subject to legislation and regulation in various jurisdictions. We have been subject to cyber-attacks in the past and we may suffer data security breaches arising from future attacks. We may currently be at a higher risk of a security breach due to the COVID-19 pandemic and the increased number of our employees who are working remotely. Data security breaches suffered by well-known companies and institutions have attracted a substantial amount of media attention, prompting state and federal legislative proposals addressing data privacy and security. We may become exposed to potential liabilities with respect to the data that we collect, manage and process, and may incur legal costs if our information security policies and procedures are not effective or if we are required to defend our methods of collection, processing and storage of personal data. Future investigations, lawsuits or adverse publicity relating to our methods of handling personal data could adversely affect our business, results of operations, financial condition and cash flows due to the costs and negative market reaction relating to such developments.

We may not have the resources or technical expertise to anticipate or prevent rapidly evolving types of cyber-attacks. Attacks have been targeted at us, our customers, or others who have entrusted us with information. Actual or anticipated attacks will cause us to incur increased costs, including costs to hire additional personnel, purchase additional protection technologies, train employees, and engage third-party experts and consultants. In addition, data and security breaches can also occur as a result of non-technical issues, including breach by us or by persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. Any compromise or breach of our security could result in violation of applicable privacy and other laws, significant legal and financial exposure, and a loss of confidence in our security measures, which could have a material adverse effect on our results of operations and our reputation.

Our business is affected by advances in automotive technology.

The demand for our products and services could be adversely affected by continuing developments in automotive technology. Automotive manufacturers are producing cars that last longer and require service and maintenance at less frequent intervals in certain cases. Quality improvement of manufacturers’ original equipment parts has in the past reduced, and may in the future reduce, demand for our products and services, adversely affecting our sales. For example, manufacturers’ use of stainless steel exhaust components has significantly increased the life of those parts, thereby decreasing the demand for exhaust repairs and replacements. Longer and more comprehensive warranty or service programs offered by automobile manufacturers and other third parties also could adversely affect the demand for our products and services. We believe that a majority of new automobile owners have their cars serviced by a dealer during the period that the car is under warranty. In addition, advances in automotive technology continue to require us to incur additional costs to update our diagnostic capabilities and technical training programs. Changes in vehicle and powertrain technology and advances in autonomous vehicles and mobility could have a negative effect on our business, results of operations or investors’ perception of our business, any of which could have an adverse effect upon the price of our common stock.

We may not be successful in integrating new and acquired stores.

Management believes that our continued growth in sales and profit is dependent, in large part, upon our ability to operate new stores that we open or acquire on a profitable basis. In order to do so, we must find reasonably priced new store locations and acquisition candidates that meet our criteria and we must integrate any new stores (opened or acquired) into our system. Our growth and profitability could be adversely affected if we are unable to open or acquire new stores or if new or existing stores do not operate at a sufficient level of profitability. In addition, our profitability could be adversely affected if we fail to retain key personnel from acquired stores or assume unanticipated liabilities of acquired businesses. To the extent we acquire stores or expand into new geographic regions, we must anticipate the needs of customers and the vehicle population in those regions, which may differ from our existing customers and the vehicle populations we serve, while integrating the stores in the new geographic region into our existing network of stores. If new stores do not achieve expected levels of profitability or we are unable to integrate stores in new geographic regions into our business, our ability to remain in compliance with our debt covenants or to make required payments under our credit facility may be adversely impacted.

If our capital investments in remodeling existing or acquired stores, building new stores, and improving technology do not achieve appropriate returns, our competitive position, financial condition and results of operations could be adversely affected.

Our business depends, in part, on our ability to remodel existing or acquired stores and build new stores in a manner that achieves appropriate returns on our capital investment. Pursuing the wrong remodel or new store opportunities and any delays, cost increases, disruptions or other uncertainties related to those opportunities could adversely affect our results of operations.

We are currently making, and expect to continue to make, significant investments in technology to improve certain management systems. The effectiveness of these investments can be less predictable than remodeling stores, and might not provide the anticipated benefits or desired rates of return.

Pursuing the wrong investment opportunities, making an investment commitment significantly above or below our needs, or failing to effectively incorporate acquired businesses into our business could result in the loss of our competitive position and adversely affect our financial condition or results of operations.

Any impairment of goodwill, other intangible assets or long-lived assets could negatively impact our results of operations.

Our goodwill, other intangible assets and long-lived assets are subject to an impairment test on an annual basis and are also tested whenever events and circumstances indicate that goodwill, intangible assets and/or long-lived assets may be impaired. Any excess goodwill resulting from the impairment test must be written off in the period of determination. Intangible assets (other than goodwill and indefinite-lived intangible assets) and other long-lived assets are generally amortized or depreciated over the useful life of such assets. In addition, from time to time, we may acquire or make an investment in a business that will require us to record goodwill based on the purchase price and the value of the acquired tangible and intangible assets. We have significantly increased our goodwill as a result of our acquisitions. We may subsequently experience unforeseen issues with the businesses we acquire, which may adversely affect the anticipated returns of the business or value of the intangible assets and trigger an evaluation of recoverability of the recorded goodwill and intangible assets. Future determinations of significant write-offs of goodwill, intangible assets or other long-lived assets, as a result of an impairment test or any accelerated amortization or depreciation of other intangible assets or other long-lived assets, including those caused by the impact of the COVID-19 pandemic, could have a material negative impact on our results of operations and financial condition. We have completed our annual impairment test for goodwill, and have concluded that we do not have any impairment of goodwill for the year ended March 28, 2020. Additionally, we have evaluated our ability to recover the carrying value of our intangible assets and also concluded that we do not have any impairment of intangible assets for the year ended March 28, 2020. However, we evaluated certain stores having indicators of impairment based on operating performance and taking into consideration the negative impact of the COVID-19 pandemic on forecasted store performance. Based on the estimate of future recoverable cash flows, we recorded an impairment of long-lived assets of $2.3 million for the year ended March 28, 2020.

Planned store closings have resulted in acceleration of costs and future store closings could result in additional costs.

From time to time, in the ordinary course of our business, we close certain stores, generally based on considerations of store profitability, competition, strategic factors and other considerations. The economic impact of the COVID-19 pandemic may require us to close certain stores either temporarily or permanently. Closing a store could subject us to costs including the write-down of leasehold improvements, equipment, furniture and fixtures. In addition, we could remain liable for future lease obligations.

In particular, during the fourth quarter of fiscal 2020, we evaluated market segmentation and demographic data specific to geographic areas where our stores are located. As a result, we plan to close 36 underperforming stores in fiscal 2021 that we have identified to have failed to maintain an acceptable level of profitability. We recorded $4.3 million in store closure impairment costs in fiscal 2020 related to these planned store closures in fiscal 2021.

If we are unable to generate sufficient cash flows from our operations, our liquidity will suffer and we may be unable to satisfy our obligations.

We currently rely on cash flow from operations and our $600 million revolving credit facility with eight banks (the “Revolving Credit Facility”) to fund our business. Amounts outstanding on the Revolving Credit Facility are reported as debt on our balance sheet. While we believe that we have the ability to sufficiently fund our planned operations and capital expenditures for the foreseeable future, various risks to our business could result in circumstances that would materially affect our liquidity. For example, cash flows from our operations could be affected by changes in consumer spending habits, the failure to maintain favorable vendor payment terms or our inability to successfully implement sales growth initiatives, among other factors. We may be unsuccessful in securing alternative financing when needed on terms that we consider acceptable.

On March 27, 2020, we notified Citizens Bank, N.A. (the “Administrative Agent”), as administrative agent of the Revolving Credit Facility that we were requesting to borrow $350.4 million under the Revolving Credit Facility in order to enhance liquidity and financial flexibility given the uncertain market conditions caused by the COVID-19 pandemic. Prior to March 27, 2020, there was $216.0 million outstanding under the Revolving Credit Facility. Significant increases in our leverage could have the following risks:

our ability to obtain additional financing for working capital, capital expenditures, store renovations, acquisitions or general corporate purposes may be impaired in the future;

our failure to comply with the financial and other restrictive covenants governing our debt, which, among other things, require us to comply with certain financial ratios and limit our ability to incur additional debt and sell assets, could result in an event of default that, if not cured or waived, could have a material adverse effect on our business, financial condition and results of operations; and

our exposure to certain financial market risks, including fluctuations in interest rates associated with bank borrowings could become more significant.

Although we believe that we will remain in compliance with our debt covenants, if we are not able to do so our lenders may restrict our ability to draw on our Revolving Credit Facility, which could have a negative impact on our operations and growth potential.

We may not pay or may reduce the dividends on our common stock.

Holders of our common stock are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we have historically declared cash dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividend in the future. This could adversely affect the market price of our common stock.

We rely on an adequate supply of skilled field personnel.

In order to continue to provide high quality services, we require an adequate supply of skilled field managers and technicians. Trained and experienced automotive field personnel are in high demand, and may be in short supply in some areas. We cannot assure that we will be able to attract, motivate and maintain an adequate skilled workforce necessary to operate our existing and future stores efficiently, or that labor expenses will not increase as a result of a shortage in the supply of skilled field personnel, thereby adversely impacting our financial performance. While the automotive repair industry generally operates with high field employee turnover, any material increases in employee turnover rates in our stores or any widespread employee dissatisfaction could also have a material adverse effect on our business, financial condition and results of operations.

We depend on the services of our key executives.

Our senior executives are important to our success because they have been instrumental in setting our strategic direction, operating our business, identifying, recruiting and training key personnel, identifying expansion opportunities and arranging necessary financing. Losing the services of any of these individuals could adversely affect our business until a suitable replacement is found. It may be difficult to replace them quickly with executives of comparable experience and capabilities. Although we have employment agreements with certain of our executives, we cannot prevent them from terminating their employment with us. To the extent we have turnover within our management team, we may have to spend more time and resources training new members of management and integrating them in our company. The loss of service of any one of our key executives would likely cause a disruption in our business plans and may adversely impact our results of operations.

The market price of our common stock may be volatile and could expose us to shareholder action including securities class action litigation.

The stock market and the price of our common stock may be subject to wide fluctuations based upon general economic and market conditions, including the stock market’s recent volatility as a result of the COVID-19 pandemic. Downturns in the stock market may cause the price of our common stock to decline. The market price of our stock may also be affected by our ability to meet analysts’ expectations. Failure to meet such expectations, even slightly, could have an adverse effect on the price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, shareholder action including securities class action litigation has often been instituted against such a company. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources, which could have an adverse effect on our business.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Company, through Monro Service Corporation, owns its office/warehouse facility of approximately 171,500 square feet, which is located on 12.7 acres of land in Holleder Technology Park, in Rochester, New York. Monro Service Corporation also owns a second office/warehouse facility of approximately 28,000 square feet, which is located on 11.8 acres of land in Swanzey, New Hampshire. Additionally, the Company owns one retread facility in North Carolina.

Of Monro's 1,283 Company-operated stores at March 28, 2020, 332 were owned, 886 were leased and for 65 stores, only the land was leased. We lease additional warehouse space in California, Kentucky, Maryland, North Carolina, South Carolina, Tennessee, and Virginia, and office space in Illinois for our Car-X franchise operations. In addition to the Company-operated stores, eight wholesale locations and two retread facilities were leased at March 28, 2020. In general, we lease store sites for a ten-year period with several five-year renewal options. Giving effect to all renewal options, approximately 64% of the leases (610 stores) expire after March 2030. Certain leases provide for contingent rental payments if a percentage of annual gross sales exceed the base fixed rental amount. The highest contingent percentage rent of any lease is 7.5%, and no such lease has adversely affected profitability of the store subject thereto.

Item 3. Legal Proceedings

We are not a party or subject to any legal proceedings other than certain claims and lawsuits that arise in the normal course of our business. We do not believe that such claims or lawsuits, individually or in the aggregate, will have a material adverse effect on our financial condition or results of operations.

Item 4. Mine Safety Disclosures

Not applicable.

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PART II

Item 5. Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

MARKET INFORMATION

Monro’s common stock, par value $.01 per share, (the “Common Stock”) is traded on the Nasdaq Stock Market under the symbol "MNRO".

HOLDERS

At May 22, 2020, Monro’s Common Stock was held by approximately 46 shareholders of record. This figure does not include an estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies.

DIVIDENDS

The declaration of and determination as to the 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 contractual restrictions, and such other factors as the Board of Directors deems relevant. Under our Revolving Credit Facility, we may declare, make or pay any dividend or distribution up to $38.5 million in the aggregate for the period from June 30, 2020 to June 30, 2021 if we are in compliance with the financial covenants and other restrictions in the Revolving Credit Facility, as amended. For additional information regarding our Revolving Credit Facility, see Note 6 to the Company’s Consolidated Financial Statements.

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Item 6. Selected Financial Data

The following table sets forth selected financial and operating data of Monro for each fiscal year in the five-year period ended March 28, 2020. The financial data and certain operating data have been derived from Monro’s audited financial statements. This data should be read in conjunction with the financial statements and related notes included under Item 8. “Financial Statements and Supplementary Data” of this report and in conjunction with other financial information included elsewhere in this Form 10-K.

________________

Fiscal year 2018 reflects results based on a 53 week fiscal year. Results from all other fiscal years are based on a 52 week fiscal year.

(a)See Note 11 to the Company’s Consolidated Financial Statements for calculation of basic and diluted earnings per share for fiscal years 2020, 2019 and 2018.

(b)Comparable store sales data (not adjusted for days) is calculated based on the change in sales of only those stores open as of the beginning of the preceding fiscal year.

(c)Includes only Company-operated stores. No franchised, wholesale, retread or dealer locations are included.

(d)Amount does not include the funding of the purchase price of acquisitions.

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following table sets forth income statement data of Monro expressed as a percentage of sales for the fiscal years indicated:

________________

(a) The table may not subtract down by +/- 0.1% due to rounding as percentages are calculated based on unrounded numbers.

CRITICAL ACCOUNTING POLICIES

We believe that the accounting policies listed below are those that are most critical to the portrayal of our financial condition and results of operations, and that required management’s most difficult, subjective and complex judgments in estimating the effect of inherent uncertainties. This section should be read in conjunction with Note 1 to the Company’s Consolidated Financial Statements, which includes other significant accounting policies.

Business Combinations

We use the acquisition method in accounting for acquired businesses. Under the acquisition method, our financial statements reflect the operations of an acquired business starting from the completion of the acquisition. The assets acquired and liabilities assumed are recorded at their respective estimated fair values at the date of the acquisition. Any excess of the purchase price over the estimated fair values of the identifiable net assets acquired is recorded as goodwill. Significant judgment is often required in estimating the fair value of assets acquired, particularly the right of use (“ROU”) assets and intangible assets, including trade names and customer relationships. ROU assets are recorded at the present value of remaining lease payments adjusted to reflect favorable or unfavorable market terms of the lease. As a result, in the case of significant acquisitions, we normally obtain the assistance of a third-party valuation specialist in estimating the value of the ROU assets as well as intangible assets. The fair value measurements are based on available historical information and on expectations and assumptions about the future, considering the perspective of marketplace participants. Favorable or unfavorable market terms used to value the ROU assets are estimated based on comparable market data. Fair values of acquired trade names are estimated using an income approach, specifically the relief-from-royalty method. Customer relationships are valued using the cost approach or an income approach such as the excess earnings method. Assumptions utilized in the determination of fair value include forecasted sales, discount rates, royalty rates (trade names) and customer attrition rates (customer relationships). While we believe the expectations and assumptions about the future are reasonable, they are inherently uncertain. Unanticipated market or macroeconomic events and circumstances, like the COVID-19 pandemic, may occur, which could affect the accuracy or validity of the estimates and assumptions.

Carrying Values of Goodwill and Long-Lived Assets

We have a history of growth through acquisitions. Assets and liabilities of acquired businesses are recorded at their estimated fair values as of the date of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. The carrying value of goodwill is subject to an annual impairment test, which we perform in the third quarter of the fiscal year. Impairment tests may also be triggered by any significant events or changes in circumstances affecting our business.

We have one reporting unit which encompasses all operations including new acquisitions. In performing our annual goodwill impairment test, we perform a qualitative assessment to determine if it is more likely than not that the fair value is less than the carrying value of goodwill. The qualitative assessment includes a review of business changes, economic outlook, financial trends and forecasts, growth rates, industry data, market capitalization and other relevant qualitative factors. If the qualitative factors indicate a potential impairment, we compare the fair value of our reporting unit to the carrying value of our reporting unit. If the fair value is less than its carrying value, an impairment charge is recognized in an amount equal to that excess. The loss recognized cannot exceed the carrying amount of goodwill. We believe there is little risk of impairment of our goodwill.

Intangible assets primarily represent allocations of purchase price to identifiable intangible assets of acquired businesses and are amortized over their estimated useful lives. All intangibles and other long-lived assets are reviewed when events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. If such indicators are present, it is determined whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than their carrying values.

A deterioration of macroeconomic conditions may not only negatively impact the estimated operating cash flows used in our cash flow models, but may also negatively impact other assumptions used in our analyses, including, but not limited to, the estimated cost of capital and/or discount rates. Additionally, we are required to ensure that assumptions used to determine fair value in our analyses are consistent with the assumptions a hypothetical marketplace participant would use. As a result, the cost of capital and/or discount rates used in our analyses may increase or decrease based on market conditions and trends, regardless of whether our actual cost of capital has changed. Therefore, we may recognize an impairment of an intangible asset or assets even though realized actual cash flows are approximately equal to or greater than our previously forecasted amounts.

Self-Insurance Reserves

We are largely self-insured with respect to workers’ compensation, general liability and employee medical claims. In order to reduce our risk and better manage our overall loss exposure, we purchase stop-loss insurance that covers individual claims in excess of the deductible amounts, and caps total losses in a fiscal year. We maintain an accrual for the estimated cost to settle open claims as well as an estimate of the cost of claims that have been incurred but not reported. These estimates take into consideration the historical average claim volume, the average cost for settled claims, current trends in claim costs, changes in our business and workforce, and general economic factors. These accruals are reviewed on a quarterly basis or more frequently if factors dictate that a more frequent review is warranted. For more complex reserve calculations, such as workers’ compensation, we periodically use the services of an actuary to assist in determining the required reserve for open claims.

Income Taxes

We estimate our provision for income taxes, deferred tax assets and liabilities, income taxes payable and unrecognized tax benefit liabilities based on a number of factors including, but not limited to, historical pre-tax operating income, future estimates of pre-tax operating income, tax planning strategies, differences between tax laws and accounting rules of various items of income and expense, statutory tax rates and credits, uncertain tax positions and valuation allowances. We use significant judgment and estimates in evaluating our tax positions.

We record deferred tax assets and liabilities based upon the expected future tax outcome of differences between tax laws and accounting rules of various items of income and expense recognized in our results of operations using enacted tax rates in effect for the year in which the future tax outcome is expected. We evaluate our ability to realize the tax benefits associated with deferred tax assets and establish valuation allowances when we believe it is more-likely-than-not that some portion of our deferred tax assets will not be realized.

We file U.S. federal income tax returns and income tax returns in various state jurisdictions. Monro’s fiscal 2019 and 2018 U.S. federal tax years and various state tax years remain subject to income tax examinations by tax authorities. We establish tax liabilities in accordance with the accounting guidance on income taxes. Under the accounting guidance, we measure and recognize the tax benefit from an uncertain tax position taken or expected to be taken on an income tax return based on the largest benefit that is more-likely-than-not of being realized upon settlement. An uncertain income tax position will not be recognized in the financial statements unless it is more-likely-than-not to be sustained. We adjust these tax liabilities for unrecognized tax benefits, as well as the related interest and penalties, based on the latest facts and circumstances, including recently published rulings, court cases and outcomes of tax audits. Due to the complexity of some of these uncertainties, the ultimate resolution may result in an actual tax liability that differs from our estimated tax liabilities for unrecognized tax benefits and our effective tax rate may be materially impacted. While it is often difficult to predict the final outcome of, the timing of, or the tax treatment of any particular uncertain tax position, we believe that our tax balances reflect the more-likely-than-not outcome of known tax contingencies.

IMPACT OF COVID-19

In February 2020, we formed a COVID-19 Crisis Committee comprised of members of management that has been closely monitoring the impact of COVID-19 on Monro and our workforce. On March 11, 2020, the WHO declared COVID-19 a pandemic. On March 13, 2020, the U.S. government declared a national emergency and U.S. state governments have declared states of emergency, as well.

In response to the COVID-19 pandemic, many U.S. state governments, in states in which we operate, have taken preventative or protective actions, such as issuing stay-at-home orders and other social distancing measures. State and local governments have ordered temporary closures of some businesses and numerous other businesses have temporarily closed voluntarily. Further, individuals' ability to travel has been curtailed through mandated travel restrictions and may be further limited through additional voluntary or mandated closures of certain businesses. However, in our locations, the automotive undercar repair and tire sales and services industry

has been classified as an essential business and as such we are still able to provide these services while taking appropriate precautions for our employees and customers.

As mandated shutdowns and stay-at-home orders went into effect across the country, we experienced an immediate and significant decline in traffic during the fourth quarter of fiscal 2020, and this reduction in traffic has continued through the date of this report. The decline in demand caused a material deterioration in our sales in the fourth quarter of fiscal 2020, which has impacted our revenue. The full extent of the ongoing impact of the COVID-19 pandemic on our longer-term operational and financial performance will depend on future developments, many of which are outside of our control, and all of which cannot be predicted with certainty. Please see the risks set forth in “Item 1A. Risk Factors” above for further discussion of the risks that may impact our longer-term operational and financial performance.

At our store locations, we have implemented plans to adapt to changing circumstances arising from this pandemic that we will continue to update as necessary. We have increased store location cleaning, sanitizing and handwashing protocols. We have also provided face masks and other protective equipment, including sneeze guards installed at each sales counter, necessary to ensure the safety of our employees and customers.

We have also taken a number of actions in response to prevailing uncertain market conditions. In order to enhance our liquidity position, we drew down the remaining $350 million available to us under our Revolving Credit Facility in March 2020. To further improve our liquidity, we have taken the following measures to reduce costs: (i) suspended all non-critical capital expenditures, including the suspension of all capital expenditures related to our store rebrand and reimage initiatives; (ii) reduced store hours and store labor to align with reduced demand across our store locations; (iii) undertook significant reductions in operating expenses across the Company, including non-store compensation expense through the furlough of or other reduction to certain members of our non-store workforce; and (iv) paused any acquisition activity until we are able to better understand the impact of the COVID-19 pandemic. Additionally, we are undertaking conversations with landlords to discuss potential deferral or abatement of rent payments.

We are continuously monitoring the performance of our Company-operated stores to ensure the locations are sustainable during the pandemic. During the fourth quarter of fiscal 2020, we evaluated certain stores having indicators of impairment based on operating performance and after taking into consideration the negative impact of the COVID-19 pandemic on current business performance expectations, we recorded an impairment of $2.3 million on certain long-lived assets.

We have also implemented various measures intended to reduce the spread of COVID-19 among our non-store workforce including working from home and encouraging employees to adhere to prevention measures recommended by the Centers for Disease Control and the WHO. Since our non-store workforce is able to work remotely using various technology tools, we are able to maintain our operations and internal controls over financial reporting and disclosures.

Despite the challenges, some positive signs have begun to emerge. Since the low point during the beginning of April, we have experienced steady increases in sales driven by growth in traffic. However, there can be no assurance as to the time required to fully recover operations and sales to pre-pandemic levels or if we will reach those levels again.

Current Trends

Following the significant decline in traffic that we experienced during the fourth quarter of fiscal 2020, Company-operated stores have experienced steady sales increases over the last few weeks. The following table presents information about our current trends in the first quarter of fiscal 2021. There is no assurance that these trends will continue.

We define comparable store sales as sales for stores that have been open or acquired at least one fiscal year prior to March 31, 2019.

As we move through this transition and anticipate a ramp up in sales, we expect to incur some labor inefficiencies as we adjust to new protocols and operating models with a goal to remain as efficient as possible while still offering safe and high quality service to our customers. We will also incur additional costs and investments in supplies necessary to keep our teams and customers safe, such as face masks, hand sanitizer and cleaning supplies, which are all expected to be ongoing costs for the duration of the COVID-19 pandemic and recovery period.

Given the unpredictable nature of this situation, we cannot estimate with certainty the long-term impacts of COVID-19 on our business, financial condition, results of operations, or cash flows in the future.

As of June 5, 2020, we had $384.2 million in cash on hand. We believe we have sufficient liquidity available from operating cash flow and cash on hand to support our operations for at least the next 12 months.

NON-GAAP FINANCIAL MEASURES

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes certain financial measures, such as adjusted net income and adjusted diluted earnings per common share (“EPS”), not derived in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Non-GAAP financial measures should not be used as a substitute for GAAP financial measures, or considered in isolation, for the purpose of analyzing our operating performance, financial position or cash flows, and may not be comparable to similarly titled non-GAAP financial measures used by other companies. We have included reconciliations of the non-GAAP financial measures used in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to their most directly comparable GAAP measures in the section titled “Reconciliation of Non-GAAP Financial Measures” below.

RESULTS OF OPERATIONS

We have elected to omit discussion on the earliest of the three years covered by the consolidated financial statements presented. The discussion of the fiscal year ended March 31, 2018 is incorporated herein by reference to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located in our Form 10-K for the fiscal year ended March 30, 2019, filed on May 29, 2019. 

Fiscal 2020 as Compared to Fiscal 2019

Sales for fiscal 2020 increased $56.3 million or 4.7% to $1.257 billion as compared to $1.200 billion in fiscal 2019. The increase was largely due to an increase of $83.3 million related to new stores, of which $73.2 million came from the fiscal 2020 and fiscal 2019 acquisitions. Partially offsetting this was a decrease in comparable store sales of 2.3%. The decline in comparable store sales was primarily driven by a substantial decrease in traffic related to the COVID-19 pandemic late in the fourth quarter, as well as mild winter weather in the Company’s Northern markets in January and February. Additionally, there was a decrease in sales from closed stores amounting to $3.4 million. There were 361 selling days in both fiscal 2020 and fiscal 2019.

During the year ended March 28, 2020, 98 Company-operated stores were added and 12 were closed. At March 28, 2020, we had 1,283 Company-operated stores in operation compared to 1,197 Company-operated stores in operation at March 30, 2019.

During fiscal 2020, we opened one franchised location and closed one franchised location. At March 28, 2020, we had 98 franchised locations.

Comparable store front end/shocks and alignment category sales for fiscal 2020 both decreased by approximately 3% from the prior year. Additionally, maintenance services and tires category sales both decreased by approximately 2% on a comparable store basis as compared to the prior year. Comparable store brakes category sales for fiscal 2020 decreased by approximately 1% from the prior year. Comparable store sales were impacted by lower traffic, offset by higher average ticket.

Gross profit for fiscal 2020 was $476.7 million or 37.9% of sales as compared with $465.2 million or 38.8% of sales for fiscal 2019. The decrease in gross profit for fiscal 2020, as a percentage of sales, was due primarily to an increase in distribution and occupancy costs, as a percentage of sales, as we lost leverage on these largely fixed costs with lower overall comparable store sales, as well as an increase in labor costs, which increased from the prior year as a percentage of sales, due to technician staffing levels and wage inflation.

Material costs were down slightly as a percentage of sales as compared to the prior year.

Operating expenses for fiscal 2020 were $375.0 million or 29.8% of sales as compared with $338.5 million or 28.2% of sales for fiscal 2019. The increase of $36.5 million in operating expenses from the prior year includes $6.6 million recognized as an impairment of certain owned and leased assets (including $4.3 million in store closure impairment costs related to planned store closings in fiscal 2021) and $1.4 million in incremental costs related to Monro.Forward initiatives. The remaining increase is primarily due to increased expenses for 86 net new stores.

Operating income in fiscal 2020 of approximately $101.7 million decreased by 19.8% as compared to operating income of approximately $126.7 million in fiscal 2019, and decreased as a percentage of sales from 10.6% to 8.1% for the reasons described above.

Net interest expense for fiscal 2020 increased by approximately $1.2 million as compared to the prior year, and decreased as a percentage of sales from 2.3% to 2.2%. The weighted average debt outstanding for the year ended March 28, 2020 increased by approximately $81.4 million from the year ended March 30, 2019. This increase is primarily related to an increase in finance lease debt recorded in connection with the fiscal 2020 and fiscal 2019 acquisitions and greenfield expansion, as well as increase in debt outstanding under our Revolving Credit Facility. Partially offsetting this increase was a decrease in the weighted average interest rate of approximately 90 basis points from the prior year due to lower borrowing rates associated with new leases, as well as a decrease in the London Interbank Offered Rate (“LIBOR”) and prime rates from the prior year.

Income before income taxes for the year ended March 28, 2020 of approximately $74.3 million decreased by 26.0% as compared to income before income taxes of approximately $100.4 million for the year ended March 30, 2019, and decreased as a percentage of sales from 8.4% to 5.9% for the reasons described above.

The effective income tax rate was 21.9% and 20.5% of income before income taxes in fiscal 2020 and fiscal 2019, respectively. The effective income tax rate for the year ended March 30, 2019 reflects an income tax benefit of $2.0 million arising from the Internal Revenue Service’s examination of our fiscal 2016 and 2017 tax years. An income tax benefit was recorded primarily due to the difference in the federal statutory income tax rate of 35% that applies to refund amounts resulting from an application for a retroactive accounting method change that was accepted by the Internal Revenue Service, as compared to the federal statutory income tax rate of 21% for which deferred tax accounting applies. Additional discrete tax items recognized during each respective fiscal year are insignificant.

Net income for fiscal 2020 decreased by $21.7 million, or 27.2%, from $79.8 million in fiscal 2019, to $58.0 million. Diluted EPS for the year ended March 28, 2020 of $1.71 decreased 27.8% as compared to diluted EPS of $2.37 for the year ended March 30, 2019. Adjusted diluted EPS (a non-GAAP financial measure) was $2.00 and $2.40 for the year ended March 28, 2020 and March 30, 2019, respectively. Please refer to the “Reconciliation of Non-GAAP Financial Measures” section below for a discussion of this non-GAAP financial measure and a reconciliation to its most comparable GAAP measure, diluted EPS.

Reconciliation of Non-GAAP Financial Measures

In addition to reporting net income and diluted EPS, which are GAAP measures, this Form 10-K 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 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: