MONRO, INC. - Quarter Report: 2022 December (Form 10-Q)

mnro-20221224x10q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

____________________________________________________________

FORM 10-Q

____________________________________________________________

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 24, 2022

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________ to _____________

Commission File Number: 0-19357

____________________________________________________________

Monro, Inc.

(Exact name of registrant as specified in its charter)

____________________________________________________________


New York	16-0838627
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

200 Holleder Parkway, Rochester, New York	14615
(Address of principal executive offices)	(Zip code)

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

_________________________________________

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

MNRO

The Nasdaq Stock Market

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. x Yes ¨ No

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). x Yes ¨ No

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.

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨ Emerging growth company ¨

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. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of January 20, 2023, 31,396,352 shares of the registrant's common stock, $0.01 par value per share, were outstanding.

Table of Contents

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets	3
Consolidated Statements of Income and Comprehensive Income	4
Consolidated Statements of Changes in Shareholders’ Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative and Qualitative Disclosures About Market Risk	25
Item 4. Controls and Procedures	25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings	26
Item 2. UnregisteredSales of Equity Securities and Use of Proceeds	26
Item 6. Exhibits	27
Signatures	28

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Monro, Inc. Q3 2023 Form 10-Q

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CONSOLIDATED FINANCIAL STATEMENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets



(thousands, except footnotes) (unaudited)	December 24, 2022		March 26, 2022
Assets
Current assets
Cash and equivalents	$	12,999	$	7,948
Accounts receivable		13,172		14,797
Inventories		141,348		166,271
Other current assets		101,062		56,486
Total current assets		268,581		245,502
Property and equipment, net		307,427		315,193
Finance lease and financing obligation assets, net		227,716		268,406
Operating lease assets, net		211,251		213,588
Goodwill		730,486		776,714
Intangible assets, net		17,265		26,682
Other non-current assets		34,091		20,174
Long-term deferred income tax assets		2,358		5,153
Total assets	$	1,799,175	$	1,871,412
Liabilities and shareholders' equity
Current liabilities
Current portion of finance leases and financing obligations	$	40,102	$	42,092
Current portion of operating lease liabilities		36,513		34,692
Accounts payable		228,355		131,989
Federal and state income taxes payable		5,190		2,921
Accrued payroll, payroll taxes and other payroll benefits		22,555		18,540
Accrued insurance		49,492		49,391
Deferred revenue		15,475		14,153
Other current liabilities		29,667		28,186
Total current liabilities		427,349		321,964
Long-term debt		130,000		176,466
Long-term finance leases and financing obligations		308,041		357,475
Long-term operating lease liabilities		191,199		192,637
Other long-term liabilities		11,737		10,821
Long-term deferred income tax liabilities		28,971		28,560
Long-term income taxes payable		695		583
Total liabilities		1,097,992		1,088,506
Commitments and contingencies - Note 9
Shareholders' equity:
Class C Convertible Preferred stock		29		29
Common stock		400		399
Treasury stock		(205,648)		(108,729)
Additional paid-in capital		249,072		244,577
Accumulated other comprehensive loss		(4,790)		(4,494)
Retained earnings		662,120		651,124
Total shareholders' equity		701,183		782,906
Total liabilities and shareholders' equity	$	1,799,175	$	1,871,412

Class C Convertible Preferred stock Authorized 150,000 shares, $1.50 par value, $0.064 conversion value; 19,664 shares issued and outstanding

Common stock Authorized 65,000,000 shares, $0.01 par value; 39,957,473 shares issued as of December 24, 2022 and 39,906,561 shares issued as of March 26, 2022

Treasury stock 8,561,121 shares as of December 24, 2022 and 6,359,871 shares as of March 26, 2022, at cost

See accompanying Notes to Consolidated Financial Statements.

Monro, Inc. Q3 2023 Form 10-Q

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CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Income and Comprehensive Income



	Three Months Ended				Nine Months Ended
(thousands, except per share data) (unaudited)	December 24, 2022		December 25, 2021		December 24, 2022		December 25, 2021
Sales	$	335,193	$	341,781	$	1,014,546	$	1,031,298
Cost of sales, including distribution and occupancy costs		221,742		221,199		662,171		654,102
Gross profit		113,451		120,582		352,375		377,196
Operating, selling, general and administrative expenses		89,605		93,146		278,802		287,366
Operating income		23,846		27,436		73,573		89,830
Interest expense, net of interest income		5,949		5,676		17,312		18,893
Other income, net		(98)		(43)		(275)		(138)
Income before income taxes		17,995		21,803		56,536		71,075
Provision for income taxes		4,961		5,516		17,897		18,122
Net income	$	13,034	$	16,287	$	38,639	$	52,953
Other comprehensive loss
Changes in pension, net of tax		(98)		(102)		(296)		(308)
Other comprehensive loss		(98)		(102)		(296)		(308)
Comprehensive income	$	12,936	$	16,185	$	38,343	$	52,645
Earnings per share
Basic	$	0.41	$	0.48	$	1.18	$	1.57
Diluted	$	0.41	$	0.48	$	1.17	$	1.56
Weighted average common shares outstanding
Basic		31,470		33,542		32,386		33,521
Diluted		31,985		34,056		32,890		34,036

See accompanying Notes to Consolidated Financial Statements.

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Monro, Inc. Q3 2023 Form 10-Q

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CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Changes in Shareholders’ Equity



	Class C											Accumulated
	Convertible									Additional		Other
	Preferred Stock			Common Stock			Treasury Stock			Paid-In		Comprehensive		Retained		Total
(thousands) (unaudited)	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Loss		Earnings		Equity
Balance at September 25, 2021	20	$	29	39,900	$	399	6,360	$	(108,729)	$	242,061	$	(4,825)	$	643,983	$	772,918
Net income															16,287		16,287
Other comprehensive loss
Pension liability adjustment													(102)				(102)
Dividends declared
Preferred															(120)		(120)
Common															(8,722)		(8,722)
Dividend payable															(38)		(38)
Stock options and restricted stock				6		—					30						30
Stock-based compensation											1,258						1,258
Balance at December 25, 2021	20	$	29	39,906	$	399	6,360	$	(108,729)	$	243,349	$	(4,927)	$	651,390	$	781,511

Balance at September 24, 2022	20	$	29	39,957	$	400	7,977	$	(179,944)	$	247,907	$	(4,692)	$	658,070	$	721,770
Net income															13,034		13,034
Other comprehensive loss
Pension liability adjustment													(98)				(98)
Dividends declared
Preferred															(129)		(129)
Common															(8,791)		(8,791)
Dividend payable															(64)		(64)
Repurchase of stock							584		(25,704)								(25,704)
Stock options and restricted stock											10						10
Stock-based compensation											1,155						1,155
Balance at December 24, 2022	20	$	29	39,957	$	400	8,561	$	(205,648)	$	249,072	$	(4,790)	$	662,120	$	701,183

Balance at March 27, 2021	20	$	29	39,848	$	398	6,360	$	(108,729)	$	238,244	$	(4,619)	$	624,361	$	749,684
Net income															52,953		52,953
Other comprehensive loss
Pension liability adjustment													(308)				(308)
Dividends declared
Preferred															(350)		(350)
Common															(25,483)		(25,483)
Dividend payable															(91)		(91)
Stock options and restricted stock				58		1					1,975						1,976
Stock-based compensation											3,130						3,130
Balance at December 25, 2021	20	$	29	39,906	$	399	6,360	$	(108,729)	$	243,349	$	(4,927)	$	651,390	$	781,511

Balance at March 26, 2022	20	$	29	39,907	$	399	6,360	$	(108,729)	$	244,577	$	(4,494)	$	651,124	$	782,906
Net income															38,639		38,639
Other comprehensive loss
Pension liability adjustment													(296)				(296)
Dividends declared
Preferred															(386)		(386)
Common															(27,096)		(27,096)
Dividend payable															(161)		(161)
Repurchase of stock							2,201		(96,919)								(96,919)
Stock options and restricted stock				50		1					296						297
Stock-based compensation											4,199						4,199
Balance at December 24, 2022	20	$	29	39,957	$	400	8,561	$	(205,648)	$	249,072	$	(4,790)	$	662,120	$	701,183

We declared $0.28 and $0.26 dividends per common share or equivalent for the three months ended December 24, 2022 and December 25, 2021, respectively, and $0.84 and $0.76 dividends per common share or equivalent for the nine months ended December 24, 2022 and December 25, 2021, respectively.

See accompanying Notes to Consolidated Financial Statements.

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Monro, Inc. Q3 2023 Form 10-Q

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CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Cash Flows



	Nine Months Ended
(thousands) (unaudited)	December 24, 2022		December 25, 2021
Operating activities
Net income	$	38,639	$	52,953
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		58,201		60,454
Share-based compensation expense		4,199		3,130
Gain on disposal of assets		(2,748)		(507)
Gain on divestiture		(2,394)		—
Deferred income tax expense		3,306		9,633
Change in operating assets and liabilities (excluding acquisitions and divestitures)
Accounts receivable		(2,360)		615
Inventories		(12,319)		(5,952)
Other current assets		(18,156)		(8,046)
Other non-current assets		27,732		26,042
Accounts payable		96,366		5,515
Accrued expenses		5,323		2,771
Federal and state income taxes payable		2,269		10,899
Other long-term liabilities		(26,979)		(30,442)
Long-term income taxes payable		112		172
Cash provided by operating activities		171,191		127,237
Investing activities
Capital expenditures		(28,535)		(17,445)
Acquisitions, net of cash acquired		(954)		(83,167)
Proceeds from divestiture		56,586		—
Deferred proceeds received from divestiture		4,294		—
Proceeds from the disposal of assets		4,416		1,030
Other		(256)		122
Cash provided by (used for) investing activities		35,551		(99,460)
Financing activities
Proceeds from borrowings		139,176		139,862
Principal payments on long-term debt, finance leases and financing obligations		(215,439)		(163,985)
Repurchase of stock		(96,919)		—
Exercise of stock options		—		2,110
Dividends paid		(27,482)		(25,713)
Deferred financing costs		(1,027)		(497)
Cash used for financing activities		(201,691)		(48,223)
Increase (decrease) in cash and equivalents		5,051		(20,446)
Cash and equivalents at beginning of period		7,948		29,960
Cash and equivalents at end of period	$	12,999	$	9,514
Supplemental information
Leased assets (reduced) obtained in exchange for (reduced) new finance lease liabilities	$	(10,436)	$	7,307
Leased assets obtained in exchange for new operating lease liabilities	$	25,963	$	8,114

See accompanying Notes to Consolidated Financial Statements.

Monro, Inc. Q3 2023 Form 10-Q

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INDEX TO NOTES



Notes to Consolidated Financial Statements (unaudited)
Note 1 Description of Business and Basis of Presentation	8
Note 2 Acquisitions and Divestitures	9
Note 3 Earnings per Common Share	12
Note 4 Income Taxes	12
Note 5 Fair Value	12
Note 6 Cash Dividend	12
Note 7 Revenues	13
Note 8 Long-term Debt	13
Note 9 Commitments and Contingencies	14
Note 10 Share Repurchase	15

Monro, Inc. Q3 2023 Form 10-Q

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CONSOLIDATED FINANCIAL STATEMENTS

NOTES

Note 1 – Description of Business and Basis of Presentation

Description of business

Monro, Inc. and its direct and indirect subsidiaries (together, “Monro”, the “Company”, “we”, “us”, or “our”), are engaged principally in providing automotive undercar repair and tire replacement sales and tire related services in the United States. Monro had 1,296 Company-operated retail stores located in 32 states and 79 franchised locations as of December 24, 2022.

A certain number of our retail locations also service commercial customers. Our locations that serve commercial customers generally operate consistently with our other retail locations, except that the sales mix for these locations includes a higher number of commercial tires.

Monro’s operations are organized and managed as one single segment designed to offer to our customers replacement tires and tire related services, automotive undercar repair services as well as a broad range of routine maintenance services, primarily on passenger cars, light trucks and vans. We also provide other products and services for brakes; mufflers and exhaust systems; and steering, drive train, suspension and wheel alignment.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) applicable to interim financial statements. While these statements reflect all adjustments (consisting of items of a normal recurring nature) that are, in the opinion of management, necessary for a fair statement of the results of the interim period, they do not include all of the information and footnotes required by United States generally accepted accounting principles (“U.S. GAAP”) for complete financial statement presentation. The consolidated financial statements should be read in conjunction with the financial statement disclosures in our Form 10-K for the fiscal year ended March 26, 2022.

We use the same significant accounting policies in preparing quarterly and annual financial statements. For a description of our significant accounting policies followed in the preparation of the financial statements, see Note 1 of our Form 10-K for the fiscal year ended March 26, 2022.

Due to the seasonal nature of our business, quarterly operating results and cash flows are not necessarily indicative of the results that may be expected for other interim periods or the full year.

Fiscal year

We operate on a 52/53 week fiscal year ending on the last Saturday in March. Fiscal years 2023 and 2022 each contain 52 weeks. Unless specifically indicated otherwise, any references to “2023” or “fiscal 2023” and “2022” or “fiscal 2022” relate to the years ending March 25, 2023 and March 26, 2022, respectively.

Recent accounting pronouncements

In September 2022, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance which requires certain disclosure requirements for supplier finance programs used in connection with the purchase of goods and services. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2022. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance.

In October 2021, the FASB issued new accounting guidance which requires an acquiring entity to recognize and measure contract assets and contract liabilities acquired in a business combination as if they entered into the original contract at the same time and same date as the acquiree. This guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2022. Early adoption is permitted. We are currently evaluating the impact of adopting this guidance.

Other recent authoritative guidance issued by the FASB (including technical corrections to the Accounting Standards Codification (“ASC”)) and the SEC did not or are not expected to have a material effect on our consolidated financial statements.

Working capital management

As part of our ongoing efforts to manage our working capital and improve our cash flow, we work with suppliers to optimize our purchasing terms and conditions, including extending payment terms. We also facilitate a voluntary supply chain financing program to

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CONSOLIDATED FINANCIAL STATEMENTS

NOTES

provide our suppliers with the opportunity to sell receivables due from us (our accounts payable) to a participating financial institution at the sole discretion of both the supplier and the financial institution. Should a supplier choose to participate in the program, it may receive payment from the financial institution in advance of agreed payment terms; our responsibility is limited to making payments to the respective financial institution on the terms originally negotiated with our supplier. We have concluded that the program is a trade payable program and not indicative of a borrowing arrangement.

Supplemental information

Property and equipment, net: Property and equipment balances are shown on the Consolidated Balance Sheets net of accumulated depreciation of $422.3 million and $414.2 million as of December 24, 2022 and March 26, 2022, respectively.

Note 2 – Acquisitions and Divestitures

Acquisitions

Monro’s acquisitions are strategic moves in our plan to fill in and expand our presence in our existing and contiguous markets, expand into new markets and leverage fixed operating costs such as advertising and administration. Acquisitions in this note generally include acquisitions of five or more locations as well as acquisitions of one to four locations that are part of our greenfield store growth strategy.

Subsequent Event

Subsequent to December 24, 2022, we signed a definitive asset purchase agreement to complete the acquisition of five retail tire and automotive repair stores located in Iowa and Illinois. This transaction is expected to close during the fourth quarter of fiscal 2023 and is expected to be financed through our Credit Facility, as defined in Note 8.

2023

On December 4, 2022, we acquired one retail tire and automotive repair store located in Wisconsin from Spinler’s Service Systems, Inc. for $0.4 million. This store operates under the Car-X name. The acquisition was financed through our Credit Facility. The results of operations for this acquisition are included in our financial results from the acquisition date.

The acquisition resulted in goodwill related to, among other things, growth opportunities, synergies and economies of scale expected from combining the business with ours, as well as unidentifiable intangible assets. All of the goodwill is expected to be deductible for tax purposes.

We expensed all costs related to the acquisition in the three months ended December 24, 2022. These costs are included in the Consolidated Statements of Income and Comprehensive Income primarily under operating, selling, general and administrative (“OSG&A”) expenses and were not material to the Consolidated Statements of Income and Comprehensive Income for the three months and nine months ended December 24, 2022.

Sales related to the completed acquisition for the period from acquisition date through December 24, 2022 were not material to the Consolidated Statements of Income and Comprehensive Income for the three months and nine months ended December 24, 2022.

Supplemental pro forma information for the current or prior reporting periods has not been presented due to the impracticability of obtaining detailed, accurate or reliable data for the periods the acquired entity was not owned by Monro.

We accounted for the 2023 acquisition as a business combination using the acquisition method of accounting in accordance with the FASB ASC Topic 805, “Business Combinations.” The assets acquired and liabilities assumed were recorded at their acquisition-date fair values and were consolidated with those of the Company as of the acquisition date. The acquisition-date fair values were assigned on preliminary valuations and estimates, and the excess of the consideration transferred over the net identifiable assets acquired was recorded as goodwill. The preliminary allocation of the consideration transferred was not material to the Consolidated Balance Sheet as of December 24, 2022.

We continue to refine the valuation data and estimates primarily related to inventory, property and equipment, intangible assets, real property leases, warranty reserves and certain liabilities for the 2023 acquisition and expect to complete the valuations no later than the first anniversary date of the acquisition. We anticipate that adjustments will continue to be made to the fair values of identifiable assets acquired and liabilities assumed, and those adjustments may or may not be material.

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CONSOLIDATED FINANCIAL STATEMENTS

NOTES

2022

During the first nine months of fiscal 2022, we acquired the following businesses for an aggregate purchase price of $83.1 million. The acquisitions were financed through our Credit Facility. The results of operations for these acquisitions are included in our financial results from the respective acquisition dates.

On December 5, 2021, we acquired 11 retail tire and automotive repair stores operating as Car-X franchise locations in Iowa from KR Jones Enterprises, Inc. These stores operate under the Car-X name.

On November 14, 2021, we acquired three retail tire and automotive repair stores located in California from Bud’s Tire and Wheel, Inc. These stores will operate under the Tire Choice name.

On November 14, 2021, we acquired two retail tire and automotive repair stores located in California from Eagle Auto & Tire, Inc. These stores will operate under the Mountain View Tire & Service name.

On November 14, 2021, we acquired one retail tire and automotive repair store located in California from Golden Reflections. This store will operate under the Mountain View Tire & Service name.

On April 25, 2021, we acquired 30 retail tire and automotive repair stores located in California from Mountain View Tire & Service, Inc. These stores operate under the Mountain View Tire & Service name.

The acquisitions resulted in goodwill related to, among other things, growth opportunities, synergies and economies of scale expected from combining the businesses with ours, as well as unidentifiable intangible assets. All of the goodwill is expected to be deductible for tax purposes.

We expensed all costs related to the acquisitions in the nine months ended December 25, 2021. The total costs related to the completed acquisitions were $0.2 million and $0.6 million for the three and nine months ended December 25, 2021, respectively. These costs are included in the Consolidated Statements of Income and Comprehensive Income primarily under OSG&A expenses.

Sales related to the completed acquisitions for the three and nine months ended December 25, 2021 totaled $13.7 million and $33.1 million, respectively, for the period from acquisition date through December 25, 2021.

We accounted for the 2022 acquisitions as a business combination using the acquisition method of accounting and we finalized the purchase accounting related to the 2022 acquisitions during fiscal 2023. As a result of the updated purchase price allocation for the acquisitions, certain of the fair value amounts previously estimated were adjusted during the measurement period. These measurement period adjustments resulted from updated valuation reports and appraisals received from our external valuation specialists, as well as revisions to internal estimates. The measurement period adjustments were not material to the Consolidated Balance Sheet as of December 24, 2022 and the Consolidated Statements of Income and Comprehensive Income for the three months and nine months ended December 24, 2022.

The acquired assets and liabilities assumed were recorded at their assigned acquisition-date fair values and were consolidated with those of the Company as of the acquisition date. The consideration transferred and net liabilities assumed were recorded as goodwill.

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CONSOLIDATED FINANCIAL STATEMENTS

NOTES



2022 Acquisition-date Fair Values Assigned
(thousands)
Inventory	$	1,298
Other current assets		424
Property and equipment		3,612
Finance lease and financing obligation assets		19,228
Operating lease assets		30,461
Intangible assets		4,820
Other non-current assets		79
Long-term deferred income tax assets		4,814
Total assets acquired		64,736
Current portion of finance leases and financing obligations		1,832
Current portion of operating lease liabilities		3,058
Deferred revenue		1,261
Other current liabilities		273
Long-term finance leases and financing obligations		26,061
Long-term operating lease liabilities		35,304
Other long-term liabilities		1,026
Total liabilities assumed		68,815
Total net identifiable liabilities assumed	$	(4,079)
Total consideration transferred	$	83,087
Less: total net identifiable liabilities assumed		(4,079)
Goodwill	$	87,166

The total consideration of $83.1 million is comprised of $82.0 million in cash and $1.1 million which is due upon finalization of certain lease assignment terms for one store location.

We recorded $4.8 million amortizable intangible assets, including customer lists and a trade name, with a weighted-average amortizable period of approximately eight years. We have recorded acquired right-of-use assets at the present value of remaining lease payments adjusted to reflect favorable or unfavorable market terms of the lease.

Divestitures

2023

On June 17, 2022, we completed the divestiture of assets relating to our wholesale tire operations (seven locations) and internal tire distribution operations to American Tire Distributors, Inc. (“ATD”). We received $62 million from ATD at the closing of the transaction, of which $5 million is currently being held in escrow. The remaining $40 million (“Earnout”) of the total consideration of $102 million will be paid quarterly over approximately two years based on our tire purchases from or through ATD pursuant to a distribution and fulfillment agreement with ATD, of which $4.3 million was received during the three months ended December 24, 2022. Under the distribution agreement, ATD agreed to supply and sell tires to retail locations we own. After ATD satisfies the Earnout payments, our company-owned retail stores will be required to purchase at least 90 percent of their forecasted requirements for certain passenger car tires, light truck replacement tires, and medium truck tires from or through ATD. Any tires that ATD is unable to supply or fulfill from those categories will be excluded from the calculation of our requirements for tires. The initial term of the distribution agreement is five years after the completion of the Earnout Period, with automatic 12-month renewal periods thereafter. The divestiture enables us to focus our resources on our core retail business operations. In connection with this transaction, we recognized a pre-tax gain of $2.4 million within OSG&A expenses. We expensed $0.4 million of closing costs and costs associated with the closing of a related warehouse within OSG&A expenses, as finalized in September 2022. We also incurred $1.3 million in costs in connection with restructuring and elimination of certain executive management positions upon completion of the divestiture. The divestiture did not meet the criteria to be reported as discontinued operations in our consolidated financial statements as our decision to divest this business did not represent a strategic shift that will have a major effect on our operations and financial results. For additional information regarding discrete tax impacts because of the divestiture, see Note 4.

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CONSOLIDATED FINANCIAL STATEMENTS

NOTES

Note 3 – Earnings per Common Share

Basic earnings per common share amounts are calculated by dividing income available to common shareholders, after deducting preferred stock dividends, by the weighted average number of shares of common stock outstanding. Diluted earnings per common share amounts are calculated by dividing net income by the weighted average number of shares of common stock outstanding adjusted to give effect to potentially dilutive securities.



Earnings per Common Share	Three Months Ended				Nine Months Ended
(thousands, except per share data)	December 24, 2022		December 25, 2021		December 24, 2022		December 25, 2021
Numerator for earnings per common share calculation:
Net income	$	13,034	$	16,287	$	38,639	$	52,953
Less: Preferred stock dividends		(129)		(120)		(386)		(350)
Income available to common shareholders	$	12,905	$	16,167	$	38,253	$	52,603
Denominator for earnings per common share calculation:
Weighted average common shares - basic		31,470		33,542		32,386		33,521
Effect of dilutive securities:
Preferred stock		460		460		460		460
Stock based awards		55		54		44		55
Weighted average common shares - diluted		31,985		34,056		32,890		34,036

Basic earnings per common share	$	0.41	$	0.48	$	1.18	$	1.57
Diluted earnings per common share	$	0.41	$	0.48	$	1.17	$	1.56

Weighted average common share equivalents that have an anti-dilutive impact are excluded from the computation of diluted earnings per share.

Note 4 – Income Taxes

For the three months and nine months ended December 24, 2022, our effective income tax rate was 27.6 percent and 31.7 percent, respectively, compared to 25.3 percent and 25.5 percent for the three months and nine months ended December 25, 2021, respectively. Our effective income tax rate for the nine months ended December 24, 2022 was higher by 4.7 percent because of discrete tax impacts from the divestiture of assets relating to our wholesale tire operations and internal tire distribution operations as well as the revaluation of deferred tax balances due to changes in the mix of pre-tax income in various U.S. state jurisdictions because of the divestiture. Our effective income tax rate for the three months and nine months ended December 24, 2022 was higher by 0.9 percent and 0.7 percent, respectively, due to the discrete tax impact related to share-based awards. Additionally, the increase in our effective income tax rate for the three months and nine months ended December 24, 2022 over the prior year comparable period was also due to other state income tax impacts from the divestiture.

Note 5 – Fair Value

Long-term debt had a carrying amount that approximates a fair value of $130.0 million as of December 24, 2022, as compared to a carrying amount and a fair value of $176.5 million as of March 26, 2022. The carrying value of our debt approximated its fair value due to the variable interest nature of the debt.

Note 6 – Cash Dividend

We paid dividends of $27.5 million during the nine months ended December 24, 2022. The declaration and payment of future dividends will be at the discretion of the Board of Directors and will depend on our financial condition, results of operations, capital requirements, compliance with charter and Credit Facility restrictions, and such other factors as the Board of Directors deems relevant. Under our Credit Facility, there are no restrictions on our ability to declare dividends as long as we are in compliance with the covenants in the Credit Facility. For additional information regarding our Credit Facility, see Note 8.

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CONSOLIDATED FINANCIAL STATEMENTS

NOTES

Note 7 – Revenues

Automotive undercar repair, tire replacement sales and tire related services represent the vast majority of our revenues. We also earn revenue from the sale of tire road hazard warranty agreements as well as commissions earned from the delivery of tires on behalf of certain tire vendors.

Revenue from automotive undercar repair, tire replacement sales and tire related services is recognized at the time the customers take possession of their vehicle or merchandise. For sales to certain customers that are financed through the offering of credit on account, payment terms are established for customers based on our pre-established credit requirements. Payment terms may vary depending on the customer and generally are 30 days. Based on the nature of receivables, no significant financing components exist. Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. We estimate the reduction to sales and cost of sales for returns based on current sales levels and our historical return experience. Such amounts are immaterial to our consolidated financial statements.



Revenues	Three Months Ended				Nine Months Ended
(thousands)	December 24, 2022		December 25, 2021		December 24, 2022		December 25, 2021
Tires ^(a)	$	176,532	$	190,086	$	507,501	$	544,395
Maintenance		86,217		78,363		267,131		248,793
Brakes		41,396		41,556		137,613		135,704
Steering		25,379		25,894		82,973		82,246
Exhaust		5,006		5,107		17,202		17,477
Other		663		775		2,126		2,683
Total	$	335,193	$	341,781	$	1,014,546	$	1,031,298

(a) Includes the sale of tire road hazard warranty agreements and tire delivery commissions.

Revenue from the sale of tire road hazard warranty agreements is initially deferred and is recognized over the contract period as costs are expected to be incurred in performing such services, typically 21 to 36 months. The deferred revenue balances at December 24, 2022 and March 26, 2022 were $22.5 million and $20.6 million, respectively, of which $15.5 million and $14.2 million, respectively, are reported in Deferred revenue and $7.0 million and $6.4 million, respectively, are reported in Other long-term liabilities in our Consolidated Balance Sheets.



Changes in Deferred Revenue
(thousands)
Balance at March 26, 2022	$	20,632
Deferral of revenue		17,775
Recognition of revenue		(15,875)
Balance at December 24, 2022	$	22,532

As of December 24, 2022, we expect to recognize $5.0 million of deferred revenue related to road hazard warranty agreements in the remainder of fiscal 2023, $12.6 million of deferred revenue during our fiscal year ending March 30, 2024, and $4.9 million of deferred revenue thereafter.

Under various arrangements, we receive from certain tire vendors a delivery commission and reimbursement for the cost of the tire that we may deliver to customers on behalf of the tire vendor. The commission we earn from these transactions is as an agent and the net amount retained is recorded as sales.

Note 8 – Long-term Debt

In April 2019, we entered into a new five year $600 million revolving credit facility agreement with eight banks (the “Credit Facility”). Interest only is payable monthly throughout the Credit Facility’s term. The borrowing capacity for the Credit Facility of $600 million includes an accordion feature permitting us to request an increase in availability of up to an additional $250 million. The Credit Facility initially bore interest at 75 to 200 basis points over the London Interbank Offered Rate (“LIBOR”) (or replacement index) or at the prime rate, depending on the type of borrowing and the rates then in effect.

On June 11, 2020, we entered into a First Amendment to the Credit Facility (the “First Amendment”), which, among other things, amended the terms of certain of the financial and restrictive covenants in the credit agreement through the first quarter of fiscal 2022 to provide us with additional flexibility to operate our business. The First Amendment amended the interest rate charged on borrowings to be based on the greater of adjusted one-month LIBOR or 0.75 percent. For the period from June 30, 2020 to June 30, 2021, the minimum interest rate spread charged on borrowings was 225 basis points over LIBOR. Additionally, during the same

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CONSOLIDATED FINANCIAL STATEMENTS

NOTES

period, we were permitted to declare, make or pay any dividend or distribution up to $38.5 million in the aggregate and the acquisition of stores or other businesses up to $100 million in the aggregate were permitted if we were in compliance with the financial covenants and other restrictions in the First Amendment and Credit Facility. As of July 1, 2021, the ability of our Board of Directors to declare, make or pay any dividend or distribution and our ability to acquire stores or other businesses is no longer restricted by the terms of the Credit Facility, as amended by the First Amendment. The Credit Facility requires fees payable quarterly throughout the term between 0.125 percent and 0.35 percent of the amount of the average net availability under the Credit Facility during the preceding quarter.

On October 5, 2021, we entered into a Second Amendment to the Credit Facility (the “Second Amendment”). The Second Amendment amended the interest rate charged on borrowings to be based on the greater of adjusted one-month LIBOR or 0.00 percent. In addition, the Second Amendment updated certain provisions regarding a successor interest rate to LIBOR.

On November 10, 2022, we entered into a Third Amendment to the Credit Facility (the “Third Amendment”). The Third Amendment, among other things, extended the term of the Credit Facility to November 10, 2027 and amended certain of the financial terms in the Credit Agreement, as amended by the Second Amendment. The Third Amendment amended the interest rate charged on borrowings to be based on 0.10 percent over the Secured Overnight Financing Rate (“SOFR”), replacing the previously used LIBOR. In addition, one additional bank was added to the bank syndicate for a total of nine banks now within the syndicate. Except as amended by the First Amendment, Second Amendment and Third Amendment, the remaining terms of the credit agreement remain in full force and effect.

Within the Credit Facility, we have a sub-facility of $80 million available for the purpose of issuing standby letters of credit. The sub-facility requires fees aggregating 87.5 to 212.5 basis points annually of the face amount of each standby letter of credit, payable quarterly in arrears. There was a $29.6 million outstanding letter of credit at December 24, 2022.

There was $130.0 million outstanding and $440.4 million available under the Credit Facility at December 24, 2022.

We were in compliance with all debt covenants at December 24, 2022.

Note 9 – Commitments and Contingencies

Commitments



Commitments Due by Period				Within		2 to		4 to		After
(thousands)		Total		1 Year		3 Years		5 Years		5 Years
Principal payments on long-term debt	$	130,000					$	130,000
Finance lease commitments/financing obligations ^(a)		432,584	$	54,725	$	102,549		94,119	$	181,191
Operating lease commitments ^(a)		262,202		43,232		78,285		61,243		79,442
Accrued rent		254		175		30		24		25
Total	$	825,040	$	98,132	$	180,864	$	285,386	$	260,658

(a)Finance and operating lease commitments represent future undiscounted lease payments and include $94.6 million and $60.6 million, respectively, related to options to extend lease terms that are reasonably certain of being exercised.

Contingencies

We are currently a party to various claims and legal proceedings incidental to the conduct of our business. If management believes that a loss arising from any of these matters is probable and can reasonably be estimated, we will record the amount of the loss, or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another. As additional information becomes available, any potential liability related to these matters is assessed and the estimates are revised, if necessary. Litigation is subject to inherent uncertainties, and unfavorable rulings could occur and may include monetary damages. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the financial position and results of operations of the period in which any such ruling occurs, or in future periods.

A purported class action filed in March 2021 and a related Private Attorneys General Action (PAGA) filed in September 2021 in Los Angeles County Superior Court of California alleges we violated the rights of certain hourly, non-exempt employees in California under state wage and hour laws. The matter is in the early stage of discovery and we intend to vigorously defend the Company. The parties have participated in mediation and have agreed to continue settlement discussions. We included $0.5 million in OSG&A expenses in our Consolidated Statements of Income and Comprehensive Income for the three months and nine months ended December 24, 2022 for this matter.

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CONSOLIDATED FINANCIAL STATEMENTS

NOTES

Note 10 – Share Repurchase

On May 19, 2022, our Board of Directors authorized a share repurchase program for the repurchase of up to $150 million of shares of our common stock. The Board of Directors did not specify a date upon which the authorization will expire. Shares repurchased under this authorization will become treasury shares.

We periodically repurchased shares of our common stock under the repurchase program through open market transactions.


Share Repurchase Activity	Three Months Ended		Nine Months Ended
(thousands, except per share data)	December 24, 2022		December 24, 2022
Number of shares purchased		583.8		2,201.3
Average price paid per share	$	44.00	$	44.00
Total repurchased	$	25,687	$	96,853

On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was enacted into law. The IRA includes a one percent excise tax on stock repurchases. The new excise tax equals one percent of the fair market value of the stock repurchased, less the fair market value of stock issued, during the tax year. The excise tax applies to repurchases of stock after December 31, 2022.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

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

Economic Conditions

The United States economy has experienced high inflation during fiscal 2023 and there are market expectations that inflation may remain at elevated levels for a sustained period. In addition, labor availability has continued to be constrained and market labor costs have continued to increase. The U.S. Federal Reserve Board also has increased interest rates during fiscal 2023 and additional interest rate increases may occur in the coming months. These conditions may give rise to an economic slowdown, and perhaps a recession, and could further increase our costs and/or impact our revenues. It is unclear whether the current economic conditions and government responses to these conditions, including inflation, and increasing interest rates will result in an economic slowdown or recession in the United States. If that occurs, demand for our products and services may decline, possibly significantly, which may significantly and adversely impact our business, results of operations and financial position.

2023 Divestiture

On June 17, 2022, we completed the sale of assets relating to our wholesale tire operations (seven locations) and internal tire distribution operations to American Tire Distributors, Inc. (“ATD”). The total purchase price was $102 million, consisting of $62 million paid by ATD at closing, of which $5 million is currently being held in escrow, and the remaining $40 million will be paid quarterly over approximately two years based on our tire purchases from or through ATD pursuant to a distribution and fulfillment agreement, of which $4.3 million was received during the three months ended December 24, 2022. For details regarding the sale, see Note 2 to our consolidated financial statements. In the nine months ended December 24, 2022, we experienced lower top-line sales due to the sale of our wholesale tire operations to ATD and we incurred $1.3 million in costs in connection with restructuring and elimination of certain executive management positions upon completion of the divestiture.

Financial Summary

Third quarter 2023 included the following notable items:

Diluted earnings per common share (“EPS”) were $0.41.

Adjusted diluted EPS, a non-GAAP measure, were $0.43.

Sales decreased 1.9 percent, due to lower overall tire sales because of the sale of our wholesale tire operations.

Comparable store sales increased 5.6 percent, driven primarily by an approximately 12 percent comparable store sales increase in approximately 300 of our small or underperforming stores. Adjusted for selling days, comparable store sales increased 4.4 percent.

Operating income of $23.8 million was 13.1 percent lower than the comparable prior-year period, driven primarily by a decrease in gross profit.

Net income was $13.0 million.

Adjusted net income, a non-GAAP measure, was $13.6 million.


Earnings Per Common Share	Three Months Ended						Nine Months Ended
	December 24, 2022		December 25, 2021		Change		December 24, 2022		December 25, 2021		Change
Diluted EPS	$	0.41	$	0.48	(14.6)	%	$	1.17	$	1.56	(25.0)	%
Adjustments		0.02		0.01				0.10		0.09
Adjusted diluted EPS	$	0.43	$	0.49	(12.2)	%	$	1.27	$	1.66	(23.5)	%

Note: Amounts may not foot due to rounding.

Adjusted net income and adjusted diluted EPS, each of which is a measure not derived in accordance with U.S. GAAP, exclude the impact of certain items. Management believes that adjusted net income and adjusted diluted EPS are useful in providing period-to-period comparisons of the results of our operations by excluding certain non-recurring items, such as litigation reserves and costs related to shareholder matters, and items related to store closings as well as Monro.Forward or acquisition initiatives. Reconciliations of these non-GAAP financial measures to GAAP measures are provided beginning on page 20 under “Non-GAAP Financial Measures.”

We define comparable store sales as sales for locations that have been opened or owned at least one full fiscal year. We believe this period is generally required for new store sales levels to begin to normalize. Management uses comparable store sales to assess the operating performance of the Company’s stores and believes the metric is useful to investors because our overall results are dependent upon the results of our stores. Comparable sales measures vary across the retail industry. Therefore, our comparable store sales calculation is not necessarily comparable to similarly titled measures reported by other companies.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Analysis of Results of Operations



Summary of Operating Income	Three Months Ended						Nine Months Ended
(thousands)	December 24, 2022		December 25, 2021		Change		December 24, 2022		December 25, 2021		Change
Sales	$	335,193	$	341,781	(1.9)	%	$	1,014,546	$	1,031,298	(1.6)	%
Cost of sales, including distribution and occupancy costs		221,742		221,199	0.2			662,171		654,102	1.2
Gross profit		113,451		120,582	(5.9)			352,375		377,196	(6.6)
Operating, selling, general and administrative expenses		89,605		93,146	(3.8)			278,802		287,366	(3.0)
Operating income	$	23,846	$	27,436	(13.1)	%	$	73,573	$	89,830	(18.1)	%

Sales

Sales include automotive undercar repair, tire replacement and tire related service sales, net of discounts, returns, etc., and revenue from the sale of warranty agreements and commissions earned from the delivery of tires. See Note 7 to our consolidated financial statements for further information. We use comparable store sales to evaluate the performance of our existing stores by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. There were 90 selling days in the three months ended December 24, 2022 and 89 selling days in the three months ended December 25, 2021, and 271 selling days in the nine months ended December 24, 2022 and 270 selling days in the nine months ended December 25, 2021. We had one additional selling day in the three months and nine months ended December 24, 2022 due to a shift in timing of the Christmas holiday from the third quarter in fiscal 2022 to the fourth quarter in fiscal 2023.

Sales growth – from both comparable store sales and new stores – represents an important driver of our long-term profitability. We expect that comparable store sales growth will significantly impact our total sales growth. We believe that our ability to successfully differentiate our customers’, often referred to as “guests”, experience through a careful combination of merchandise assortment, price strategy, convenience, and other factors will, over the long-term, drive both increasing guest traffic and the average ticket amount spent.



Sales	Three Months Ended					Nine Months Ended
(thousands)	December 24, 2022			December 25, 2021		December 24, 2022			December 25, 2021
Sales	$	335,193		$	341,781	$	1,014,546		$	1,031,298
Dollar change compared to prior year	$	(6,588)				$	(16,752)
Percentage change compared to prior year		(1.9)	%				(1.6)	%

The sales decrease was due to a decrease in sales from closed stores, driven by the sale of our wholesale tire operations in the first quarter of fiscal 2023. Sales for the wholesale locations were approximately $27.7 million in the three months ended December 25, 2021. This was partially offset by an increase in comparable store sales from an increase in average ticket amount across product categories and price points and an increase in sales from new stores. The following table shows the primary drivers of the change in sales for each of the three months and nine months ended December 24, 2022, as compared to the same periods ended December 25, 2021.



Sales Percentage Change	Three Months Ended			Nine Months Ended
	December 24, 2022			December 24, 2022
Sales change		(1.9)	%		(1.6)	%
Primary drivers of change in sales
Closed store sales ^(a)		(8.5)	%		(6.1)	%
Comparable store sales ^(b)(c)		4.9	%		2.1	%
New store sales ^(d)		1.8	%		2.5	%

(a)Sales from the wholesale locations sold to ATD constitute most of the change between the three months ended December 24, 2022 and December 25, 2021 and the nine months ended December 24, 2022 and December 25, 2021.

(b)On a comparable store sales basis, comparable store sales increased by 5.6 percent and 2.3 percent for the three months and nine months ended December 24, 2022, respectively. Adjusted for selling days, comparable store sales increased by 4.4 percent and 2.0 percent for the three months and nine months ended December 24, 2022, respectively, on a comparable store sales basis.

(c)On a comparable store sales basis, comparable store sales at our retail locations increased by 3.2 percent (3.0 percent adjusted for selling days) for the nine months ended December 24, 2022.

(d)Sales from the fiscal 2023 acquisition and fiscal 2022 acquisitions represent the change between the three months ended December 24, 2022 and December 25, 2021 and the nine months ended December 24, 2022 and December 25, 2021.

Broad-based inflationary pressures impacting consumers, including higher fuel prices and the negative impact on miles driven, partly led to lower demand in some of our key service categories during the three months and nine months ended December 24, 2022. We expect the inflationary environment to continue to impact our customers throughout the remainder of fiscal 2023.

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MANAGEMENT’S DISCUSSION AND ANALYSIS


Comparable Store Product Category Sales Change^(a)	Three Months Ended				Nine Months Ended
	December 24, 2022		December 25, 2021		December 24, 2022		December 25, 2021
Tires ^(b)	8	%	11	%	4	%	15	%
Maintenance service	7	%	11	%	3	%	22	%
Brakes	(5)	%	28	%	(3)	%	39	%
Alignment	(5)	%	28	%	(5)	%	37	%
Front end/shocks	(5)	%	14	%	(1)	%	23	%
Exhaust	(7)	%	14	%	(4)	%	18	%

(a)The comparable store product category sales change for the three months and nine months ended December 24, 2022 are adjusted for selling days.

(b)Adjusted for selling days, comparable store tire sales increased six percent at our retail locations during the nine months ended December 24, 2022.

For the three months and nine months ended December 25, 2021, the comparable store sales increase across all product categories reflect higher traffic and higher average ticket sales compared to the prior period in which the coronavirus (“COVID-19”) pandemic had a more volatile impact on demand.



Sales by Product Category	Three Months Ended				Nine Months Ended
	December 24, 2022		December 25, 2021		December 24, 2022		December 25, 2021
Tires	53	%	56	%	50	%	53	%
Maintenance service	26		23		26		24
Brakes	12		12		14		13
Steering ^(a)	8		8		8		8
Exhaust	1		1		2		2
Total	100	%	100	%	100	%	100	%

(a)Steering product category includes front end/shocks and alignment product category sales.



Change in Number of Company-Operated Retail Stores	Three Months Ended		Nine Months Ended
	December 24, 2022	December 25, 2021	December 24, 2022	December 25, 2021
Beginning store count	1,297	1,288	1,304	1,263
Opened ^(a)	1	17	4	47
Closed	(2)	(2)	(12)	(7)
Ending store count	1,296	1,303	1,296	1,303

(a) The stores opened in the three months and nine months ended December 25, 2021 relate to stores acquired from the fiscal 2022 acquisitions.

Cost of Sales and Gross Profit


Gross Profit	Three Months Ended						Nine Months Ended
(thousands)	December 24, 2022			December 25, 2021			December 24, 2022			December 25, 2021
Gross profit	$	113,451		$	120,582		$	352,375		$	377,196
Percentage of sales		33.8	%		35.3	%		34.7	%		36.6	%
Dollar change compared to prior year	$	(7,131)					$	(24,821)
Percentage change compared to prior year		(5.9)	%					(6.6)	%

The decrease in gross profit, as a percentage of sales, of 150 and 190 basis points (“bps”) for the three months and nine months ended December 24, 2022, respectively, as compared to the prior year comparable period were primarily due to an increase in retail material costs, which increased as a percentage of sales, as a result of a shift to a higher mix of tire sales at our retail locations, along with customers trading down to opening price point tires and because we intentionally did not fully pass through in price increases the inflationary impact on material costs to a consumer already impacted by inflationary conditions. The decrease in gross profit, as a percentage of sales, was also partially due to an increase in technician labor costs, as a percentage of sales, as we have made incremental investment in technician labor costs during fiscal 2023 to support current and future sales growth. We do not expect further significant incremental investment in technician headcount. Partially offsetting these increases was the impact from our wholesale operations which were sold during the first three months of fiscal 2023. Additionally, there was a decrease in distribution and occupancy costs, as a percentage of sales, as we gained leverage on these largely fixed costs with higher overall comparable store sales.

Monro, Inc. Q3 2023 Form 10-Q

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MANAGEMENT’S DISCUSSION AND ANALYSIS



Gross Profit as a Percentage of Sales Change	Three Months Ended			Nine Months Ended
		December 24, 2022			December 24, 2022
Gross profit change		(150)	bps		(190)	bps
Primary drivers of change in gross profit as a percentage of sales
Retail material costs		(320)	bps		(280)	bps
Technician labor costs		(80)	bps		(60)	bps
Retail distribution and occupancy costs		50	bps		20	bps
Impact from sale of wholesale operations		200	bps		230	bps

OSG&A Expenses



OSG&A Expenses	Three Months Ended						Nine Months Ended
(thousands)	December 24, 2022			December 25, 2021			December 24, 2022			December 25, 2021
OSG&A Expenses	$	89,605		$	93,146		$	278,802		$	287,366
Percentage of sales		26.7	%		27.3	%		27.5	%		27.9	%
Dollar change compared to prior year	$	(3,541)					$	(8,564)
Percentage change compared to prior year		(3.8)	%					(3.0)	%

The decrease of $3.5 million and $8.6 million in OSG&A expenses for the three months and nine months ended December 24, 2022, respectively, from the comparable prior year period is primarily due to decreased expenses from comparable stores mainly a result of cost control. The decrease in OSG&A expenses for the three months and nine months ended December 24, 2022 is also partially due to lower expenses from 14 retail stores closed and our wholesale tire locations that were sold, as compared to the prior year comparable period. The decrease in OSG&A expenses for the nine months ended December 24, 2022 is also partially due to the gain on the sale of our wholesale tire locations and tire distribution assets, net of closing costs and costs associated with the closing of a related warehouse and a decrease in litigation reserve/settlement costs. However, for the three months ended December 24, 2022, there was an increase in litigation reserve/settlement costs, primarily related to the litigation described in Note 9 of our consolidated financial statements. Partially offsetting these decreases were increased expenses for the three months and nine months ended December 24, 2022 from five new stores, a full three months of expenses for stores acquired during the three months ended December 25, 2021, and an increase in costs related to shareholder matters.



OSG&A Expenses Change	Three Months Ended		Nine Months Ended
(thousands)	December 24, 2022		December 24, 2022
OSG&A expenses change	$	(3,541)	$	(8,564)
Drivers of change in OSG&A expenses
Decrease from comparable stores	$	(4,555)	$	(8,772)
Decrease from closed retail stores and wholesale tire locations sold	$	(1,343)	$	(3,057)
Decrease from gain on sale of wholesale tire locations and tire distribution assets, net	$	—	$	(1,968)
Increase / (decrease) in litigation reserve/settlement costs	$	450	$	(3,470)
Increase from new stores	$	1,671	$	6,812
Increase in management restructuring costs	$	—	$	1,338
Increase in costs related to shareholder matters	$	236	$	553

Other Performance Factors

Net Interest Expense

Net interest expense of $5.9 million for the three months ended December 24, 2022 increased $0.3 million as compared to the prior year period, and increased as a percentage of sales from 1.7 percent to 1.8 percent. Weighted average debt outstanding for the three months ended December 24, 2022 decreased by approximately $92 million as compared to the three months ended December 25, 2021. This decrease is primarily related to a decrease in debt outstanding under the Credit Facility. The weighted average interest rate increased approximately 100 basis points from the prior year quarter due primarily to an increase in the Credit Facility’s floating borrowing rates.

Net interest expense for the nine months ended December 24, 2022 decreased $1.6 million as compared to the same period in the prior year, and decreased from 1.8 percent to 1.7 percent as a percentage of sales for the same periods. Weighted average debt outstanding decreased by approximately $83 million and the weighted average interest rate increased approximately 30 basis points as compared to the same period of the prior year.

Monro, Inc. Q3 2023 Form 10-Q

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Provision for Income Taxes

Our effective income tax rate for the three months and nine months ended December 24, 2022 was 27.6 percent and 31.7 percent, respectively, compared to 25.3 percent and 25.5 percent in the comparable prior-year periods. Our effective income tax rate for the nine months ended December 24, 2022 was higher by 4.7 percent because of discrete tax impacts from the divestiture of assets relating to our wholesale tire operations and internal tire distribution operations as well as the revaluation of deferred tax balances due to changes in the mix of pre-tax income in various U.S. state jurisdictions because of the divestiture. Our effective income tax rate for the three months and nine months ended December 24, 2022 was higher by 0.9 percent and 0.7 percent, respectively, due to the discrete tax impact related to share-based awards. Additionally, the increase in our effective income tax rate for the three months and nine months ended December 24, 2022 over the prior year comparable period was also due to other state income tax impacts from the divestiture.

Non-GAAP Financial Measures

In addition to reporting net income and diluted EPS, which are GAAP measures, this Form 10-Q includes adjusted net income and adjusted diluted EPS, which are non-GAAP financial measures. We have included reconciliations to adjusted net income and adjusted diluted EPS from our most directly comparable GAAP measures, net income and diluted EPS, below. Management views these non-GAAP financial measures as indicators to better assess comparability between periods because management believes these non-GAAP financial measures reflect our core business operations while excluding certain non-recurring items, such as litigation reserves and costs related to shareholder matters, and items related to store closings as well as Monro.Forward or acquisition initiatives.

These non-GAAP financial measures are not intended to represent, and should not be considered more meaningful than, or as an alternative to, their most directly comparable GAAP measures. These non-GAAP financial measures may be different from similarly titled non-GAAP financial measures used by other companies.

Adjusted net income is summarized as follows:


Reconciliation of Adjusted Net Income	Three Months Ended				Nine Months Ended
(thousands)	December 24, 2022		December 25, 2021		December 24, 2022		December 25, 2021
Net income	$	13,034	$	16,287	$	38,639	$	52,953
Gain on sale of wholesale tire locations and tire distribution assets, net ^(a)		—		—		(1,968)		—
Store closing costs		6		5		232		(425)
Monro.Forward initiative costs		68		418		110		569
Acquisition due diligence and integration costs		—		170		(9)		590
Litigation reserve/settlement costs		450		(161)		450		3,759
Management restructuring/transition costs ^(b)		—		—		1,338		59
Costs related to shareholder matters		236		—		553		—
Provision for income taxes on pre-tax adjustments		(191)		(104)		(178)		(1,101)
Certain discrete tax items ^(c)		—		—		2,644		—
Adjusted net income	$	13,603	$	16,615	$	41,811	$	56,404

(a)Amount includes gain on sale, net of closing costs and costs associated with the closing of a related warehouse.

(b)Costs incurred in fiscal 2023 in connection with restructuring and elimination of certain executive management positions upon completion of our sale of wholesale tire locations and tire distribution assets.

(c)Certain discrete items related to the sale of our wholesale tire locations and tire distribution assets as well as the revaluation of deferred tax balances due to changes in the mix of pre-tax income in various U.S. state jurisdictions because of the sale.

In the Reconciliation of Adjusted Net Income, we determined the Provision for income taxes on pre-tax adjustments by calculating our estimated annual effective income tax rate on pre-tax income before giving effect to any discrete tax items and applying it to the pre-tax adjustments.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Adjusted diluted EPS is summarized as follows:


Reconciliation of Adjusted Diluted EPS	Three Months Ended				Nine Months Ended
	December 24, 2022		December 25, 2021		December 24, 2022		December 25, 2021
Diluted EPS	$	0.41	$	0.48	$	1.17	$	1.56
Gain on sale of wholesale tire locations and tire distribution assets, net		—		—		(0.05)		—
Store closing costs ^(a)		0.00		0.00		0.01		(0.01)
Monro.Forward initiative costs ^(a)		0.00		0.01		0.00		0.01
Acquisition due diligence and integration costs ^(a)		—		0.00		(0.00)		0.01
Litigation reserve/settlement costs ^(a)		0.01		(0.00)		0.01		0.08
Management restructuring/transition costs ^(a)		—		—		0.03		0.00
Costs related to shareholder matters		0.01		—		0.02		—
Certain discrete tax items		—		—		0.08		—
Adjusted diluted EPS	$	0.43	$	0.49	$	1.27	$	1.66

(a) Amounts, in the periods presented, may be too minor in amount, net of the impact from income taxes, to have an impact on the calculation of adjusted diluted EPS.

Note: The calculation of the impact of non-GAAP adjustments on diluted EPS is performed on each line independently. The table may not add down by +/- $0.01 due to rounding.

The pre-tax adjustments to diluted EPS reflect estimated annual effective income tax rates on pre-tax income before giving effect to discrete items of 25.1 percent and 24.1 percent for the three months ended December 24, 2022 and December 25, 2021, respectively, and 25.1 percent and 24.2 percent for the nine months ended December 24, 2022 and December 25, 2021, respectively. See the pre-tax adjustments from the Reconciliation of Adjusted Net Income table above for pre-tax amounts.

Analysis of Financial Condition

Liquidity and Capital Resources

Capital Allocation

We expect to continue to generate positive operating cash flow as we have done in the last three fiscal years. The cash we generate from our operations will allow us to continue to support business operations as well as invest in attractive acquisition opportunities intended to drive long-term sustainable growth, pay down debt, return cash to our shareholders through our dividend program and repurchase shares of our common stock under our common stock repurchase program.

In addition, because we believe a large portion of our future expenditures will be to fund our growth, through acquisition of retail stores and/or opening greenfield stores, we continually evaluate our cash needs and may decide it is best to fund the growth of our business through borrowings on our Credit Facility. Conversely, we may also periodically determine that it is in our best interests to voluntarily repay certain indebtedness early.

Material Cash Requirements

We currently expect our capital expenditures to support our projects, including upgrading our facilities and systems, to be $35 million to $45 million in the aggregate in 2023. Additionally, we have contractual finance lease and operating lease commitments with landlords through October 2040 for $539.9 million in lease payments, of which $96.8 million is due within one year. For details regarding these lease commitments, see Note 9 to our consolidated financial statements.

As of December 24, 2022, we had $130.0 million outstanding under the Credit Facility, none of which is due in the succeeding 12 months. For details regarding our indebtedness that is due, see Note 8 to our consolidated financial statements.

We paid cash dividends totaling $27.5 million ($0.84 per share) during the nine months ended December 24, 2022. For details regarding our cash dividend, see Note 6 to our consolidated financial statements.

We returned $96.9 million to shareholders through share repurchases during the nine months ended December 24, 2022. For details regarding our share repurchase program, see Part II, Item 2, “Unregistered Sales of Equity Securities and Use of Proceeds” of this report and Note 10 to our consolidated financial statements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

We have signed a definitive asset purchase agreement to acquire five retail tire and automotive repair stores located in Iowa and Illinois. This transaction is expected to close during the fourth quarter of fiscal 2023 and is expected to be financed through our Credit Facility.

Working Capital Management

We work with suppliers to optimize payment terms and conditions on accounts payable to enhance timing of working capital and cash flows. As part of these efforts, we facilitate a voluntary supply chain finance program to provide suppliers with the opportunity to sell receivables due from Monro to a participating financial institution. For details regarding our supply chain finance program, see Note 1 to our consolidated financial statements.

Sources and Conditions of Liquidity

Our sources to fund our material cash requirements are predominantly cash from operations, availability under our Credit Facility, and cash and equivalents on hand.

As of December 24, 2022, we had $13.0 million of cash and equivalents. In addition, we had $440.4 million available under the Credit Facility as of December 24, 2022.

We believe that our current sources of funds will provide us with adequate liquidity during the 12-month period following December 24, 2022, as well as in the long-term.

Summary of Cash Flows

The following table presents a summary of our cash flows from operating, investing and financing activities.


Summary of Cash Flows	Nine Months Ended
(thousands)	December 24, 2022		December 25, 2021
Cash provided by operating activities	$	171,191	$	127,237
Cash provided by (used for) investing activities		35,551		(99,460)
Cash used for financing activities		(201,691)		(48,223)
Increase (decrease) in cash and equivalents		5,051		(20,446)
Cash and equivalents at beginning of period		7,948		29,960
Cash and equivalents at end of period	$	12,999	$	9,514

Cash provided by operating activities

For the nine months ended December 24, 2022, cash provided by operating activities was $171.2 million, which consisted of net income of $38.6 million, adjusted by non-cash charges of $60.6 million and by a change in operating assets and liabilities of $72.0 million. The non-cash charges were largely driven by $58.2 million of depreciation and amortization. The change in operating assets and liabilities was primarily due to our supply chain finance program being a source of cash as we improved our cash flow by $94.8 million. This source of cash was partially offset by our inventory balance being a use of cash of $12.3 million due to increased inventory purchases as well as accounts payable and accrued liabilities, net of vendor rebate receivables, being a use of cash of $9.7 million driven by timing of payments.

For the nine months ended December 25, 2021, cash provided by operating activities was $127.2 million, which consisted of net income of $53.0 million, adjusted by non-cash charges of $72.7 million and by a change in operating assets and liabilities of $1.5 million. The non-cash charges were largely driven by $60.5 million of depreciation and amortization. The change in operating assets and liabilities was primarily due to our federal and state income taxes payable being a source of cash of $10.9 million due largely to an income tax refund that was received. This source of cash was partially offset by our inventory balance being a use of cash of $6.0 million due to increased inventory purchases to meet higher demand, as well as accounts payable and accrued liabilities, net of vendor receivables, being a use of cash of $4.0 million driven by timing of payments.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Cash provided by / used for investing activities

For the nine months ended December 24, 2022, cash provided by investing activities was $35.6 million. This was primarily due to cash from the sale of our wholesale tire locations and tire distribution assets for $60.9 million, partially offset by cash used for capital expenditures, including property and equipment, and acquisitions of $28.5 million and $1.0 million, respectively.

For the nine months ended December 25, 2021, cash used for investing activities was $99.5 million. This was primarily due to cash used for acquisitions and capital expenditures, including property and equipment, of $83.2 million and $17.4 million, respectively. Included in the $83.2 million used for acquisitions was $0.8 million paid to the seller of the 2021 acquisition as the lease assignment for one store location was finalized during the period.

Cash used for financing activities

For the nine months ended December 24, 2022, cash used for financing activities was $201.7 million which was primarily due to payment on our Credit Facility, net of amounts borrowed during the period, of $46.4 million, as well as payment of finance lease principal and dividends of $29.8 million and $27.5 million, respectively. Also, we used $96.9 million to repurchase common stock during the period.

For the nine months ended December 25, 2021, cash used for financing activities was $48.2 million which was primarily due to payment of finance lease principal and dividends of $29.1 million and $25.7 million, respectively. These uses of cash were partially offset by cash provided by borrowings on our Credit Facility, net of amounts paid during the period, of $5.0 million.

Critical Accounting Estimates

The consolidated financial statements are prepared in accordance with GAAP. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. We base our estimates on historical experience, as appropriate, and on various other assumptions that we believe to be reasonable under the circumstances. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the estimates made by management. We evaluate our estimates and assumptions on an ongoing basis. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows may be affected.

For a description of our critical accounting estimates, refer to Part II, Item 7., “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the fiscal year ended March 26, 2022. There have been no material changes to our critical accounting estimates since our Form 10-K for the year ended March 26, 2022.

Recent Accounting Pronouncements

See “Recent Accounting Pronouncements” in Note 1 to our consolidated financial statements for a discussion of the impact of recently issued accounting standards on our consolidated financial statements as of December 24, 2022 and the expected impact on the consolidated financial statements for future periods.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains “forward-looking statements” as that term is used in the Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by the fact that they address future events, developments, and results and do not relate strictly to historical facts. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements include, without limitation, statements preceded by, followed by, or including words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “strategy,” “will,” “would” and variations thereof and similar expressions. Forward-looking statements are subject to risks, uncertainties, and other important factors that could cause actual results to differ materially from those expressed. For example, our forward-looking statements include, without limitation, statements regarding:

‎

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MANAGEMENT’S DISCUSSION AND ANALYSIS


l	the potential effect of general business or economic conditions on our business, including the direct and indirect effects of inflation, consumer demand and spending levels, labor shortages in our markets, the COVID-19 pandemic and the Russian invasion of Ukraine on the economy;
l	the impact of competitive services and pricing;
l	the effect of economic conditions, seasonality, and the impact of weather conditions and natural disasters on customer demand;
l	advances in automotive technologies;
l	our dependence on third-party vendors for certain inventory;
l	the risks associated with vendor relationships and international trade, particularly imported goods such as those sourced from China;
l	the impact of changes in U.S. trade relations and the ongoing trade dispute between the United States and China, and other potential impediments to imports;
l	our ability to service our debt obligations, including our expected annual interest expense;
l	our cash needs, including our ability to fund our future capital expenditures and working capital requirements;
l	our anticipated sales, comparable store sales, gross profit margin, costs of goods sold (including product mix), OSG&A expenses and other fixed costs, and our ability to leverage those costs;
l	management’s estimates and expectations as they relate to income tax liabilities, deferred income taxes, and uncertain tax positions;
l	management’s estimates associated with our critical accounting policies, including business combinations, insurance liabilities, and valuations for our goodwill and indefinite-lived intangible assets impairment analyses;
l	the impact of industry regulation, including changes in labor laws;
l	potential outcomes related to pending or future litigation matters;
l	business interruptions;
l	risks relating to disruption or unauthorized access to our computer systems;
l	our failure to protect customer and employee personal data;
l	our ability to realize the expected benefits of the transaction with American Tire Distributors, Inc.;
l	risks relating to acquisitions and the integration of acquired businesses with ours;
l	our growth plans, including our plans to add, renovate, re-brand, expand, remodel, relocate, or close stores and any related costs or charges, our leasing strategy for future expansion, and our ability to renew leases at existing store locations;
l	the impact of costs related to planned store closings or potential impairment of goodwill, intangible assets, and long-lived assets;
l	expected dividend payments;
l	our ability to attract, motivate, and retain skilled field personnel and our key executives; and
l	the potential impacts of climate change on our business.

Any of these factors, as well as such other factors as discussed in Part I, Item 1A., “Risk Factors” of our Form 10-K for the fiscal year ended March 26, 2022, as well as in our periodic filings with the SEC, could cause our actual results to differ materially from our anticipated results. The information provided in this report is based upon the facts and circumstances known as of the date of this report, and any forward-looking statements made by us in this report speak only as of the date on which they are made. Except as required by law, we undertake no obligation to update these forward-looking statements after the date of this Form 10-Q to reflect events or circumstances after such date, or to reflect the occurrence of unanticipated events.

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DISCLOSURES ABOUT MARKET RISK & CONTROLS AND PROCEDURES

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from potential changes in interest rates. As of December 24, 2022, excluding finance leases and financing obligations, we had no debt financing at fixed interest rates, for which the fair value would be affected by changes in market interest rates. Our cash flow exposure on floating rate debt would result in annual interest expense fluctuations of approximately $1.3 million based upon our debt position at December 24, 2022 and approximately $1.8 million based upon our debt position at March 26, 2022, given a change in SOFR (or prior index) of 100 basis points.

Debt financing had a carrying amount that approximates a fair value of $130.0 million as of December 24, 2022, as compared to a carrying amount and a fair value of $176.5 million as of March 26, 2022.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that we file or submit to the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In conjunction with the close of each fiscal quarter and under the supervision of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), we conduct an update, a review and an evaluation of the effectiveness of our disclosure controls and procedures. It is the conclusion of our Chief Executive Officer and Chief Financial Officer, based upon an evaluation completed as of the end of the most recent fiscal quarter reported on herein, that our disclosure controls and procedures were effective.

Changes in Internal Controls Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended December 24, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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SUPPLEMENTAL INFORMATION

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we are a party to or otherwise involved in legal proceedings arising out of the normal course of business. Legal matters are subject to inherent uncertainties and there exists the possibility that the ultimate resolution of one or more of these matters could have a material adverse impact on the Company, its financial condition and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On May 19, 2022, our Board of Directors authorized a share repurchase program for the repurchase of up to $150 million of shares of our common stock with no stated expiration. Under the program, we have repurchased 2.2 million shares of common stock at an average price of $44.00, for a total investment of $96.9 million. The table below presents information with respect to Monro common stock purchases made during the three months ended December 24, 2022, by Monro or any “affiliated purchaser” of Monro, as defined in Rule 10b-18(a)(3) under the Exchange Act.


Share Repurchase Activity						Dollar Value of
		Average		Total Number of		Shares that May
	Total Number	Price		Shares Purchased		Yet Be Purchased
	of Shares	Paid per		as Part of Publicly		Under Publicly
Period	Purchased	Share		Announced Programs		Announced Programs
September 25, 2022 through October 22, 2022	524,435	$	44.00		524,435	$	55,757,378
October 23, 2022 through November 26, 2022	58,937		43.98		58,937		53,165,638
November 27, 2022 through December 24, 2022	433		43.99		433		53,146,592
Total	583,805	$	44.00		583,805	$	53,146,592

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EXHIBITS

Item 6. Exhibits

Exhibit Index

10.22c – Amendment No. 3 to Amended and Restated Credit Agreement, dated as of November 10, 2022

31.1 – Certification of Michael T. Broderick pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

31.2 – Certification of Brian J. D’Ambrosia pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

32.1 – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002

101.INS - XBRL Instance Document

101.LAB - XBRL Taxonomy Extension Label Linkbase

101.PRE - XBRL Taxonomy Extension Presentation Linkbase

101.SCH - XBRL Taxonomy Extension Schema Linkbase

101.DEF - XBRL Taxonomy Extension Definition Linkbase

101.CAL - XBRL Taxonomy Extension Calculation Linkbase

104 - Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	MONRO, INC.

DATE: January 30, 2023	By:	/s/ Michael T. Broderick
		Michael T. Broderick
		President and Chief Executive Officer ‎(Principal Executive Officer)

DATE: January 30, 2023	By:	/s/ Brian J. D’Ambrosia
		Brian J. D’Ambrosia
		Executive Vice President – Finance, Chief Financial Officer and
		Treasurer (Principal Financial Officer and Principal Accounting Officer)

Monro, Inc. Q3 2023 Form 10-Q