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Surprise! No New Acquisitions by Monro

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Monro Muffler Brake Inc. is relying on new-store growth to increase sales, but the company didn't announce additional acquisitions during its second quarter earnings call Oct. 22. For Monro, acquisition announcements have become as regular as the sales figures

That doesn't mean Monro is hitting the brakes, however.

"We remain very optimistic to complete additional acquisitions in the second half of the year," says John Van Heel, Monro's CEO and president.

He reiterated the company has more than 10 non-disclosure agreements in the works, something he revealed in July. Van Heel says the environment for acquisitions remains positive, especially as more independent tire dealers approach and reach retirement age without another succession plan in place.

Van Heel also says Monro's newest markets, including Georgia and Florida, are ripe for more acquisitions in the future. The company also sees opportunities to build new stores in those same regions.

"We have a number of acquisition opportunities in those markets which I view as very positive. They're a large, dense market, a great opportunity for us," he says.

Now, here are the financials:

Monro posted net income of $18.9 million on net sales of $239.2 million for the quarter ending Sept. 26, 2015. The second quarter fiscal 2016 results are records for Monro, which reported net income of $16.3 million on net sales of $ 221.3 million in the year-ago quarter.

The company’s income-to-sales ratio for the second quarter was 7.9%. Net income increased 15.6% and sales increased 8.1% compared to the second quarter of fiscal 2015.

The company says the total sales increase for the second quarter of $17.9 million was due primarily to an increase in sales from new stores of $18.5 million, including sales from recently acquired stores of $ 17.5 million. Comparable store sales increased 2.1%. Sales were partially offset by a reduction in sales from stores that have been closed, including BJ’s locations.

The increase in comparable store sales in the second quarter breaks down as follows:

* up approximately 11% for alignments,

* up approximately 3% for tires and exhaust,

* up approximately 2% for brakes; and

* flat for maintenance services and front end/shocks.

Gross margin increased to 42.1% in the second quarter from 40.4% in the prior year, largely due to the benefit of lower material costs as a percentage of sales, increased payroll efficiency and leverage of distribution and occupancy costs.

The company says total operating expenses were $66.6 million, or 27. 9% of sales. This compares to $60.5 million, or 27.4% of sales, for the same period of the prior year. The second quarter’s operating expenses include higher due diligence costs of $.01 per share related to potential acquisitions.

Operating income for the quarter increased 17.9% to $34.1 million from $28.9 million in the second quarter of fiscal 2015. Interest expense was $3.8 million compared to $2.8 million in the second quarter of fiscal 2015.

Monro opened 35 locations and closed five locations during the second quarter, ending the quarter with 1,029 company-operated stores and 142 franchised Car-X stores.

The company’s focus on sales growth and margin improvement and the strong performance of recent acquisitions drove the quarter’s results, according to John Van Heel, president and chief executive officer.

“Sales trends have strengthened into October, with positive comparable store sales of approximately 4.2% month-to-date. Overall, we remain confident in our business model and in our ability to increase market share and deliver strong overall sales and earnings growth, regardless of the consumer or operating environment.”

First Six Month Results

For the six-month period, sales increased 8.4% to $ 475.7 million from $438.8 million in the same period of the prior year. Comparable store sales increased .8% and operating margin expanded 90 basis points to 14.2% of sales. Net income for the first six months of fiscal 2016 increased 13.3% to $37.7 million.

Acquisitions Update

In the second quarter, the company completed its previously announced acquisition of 31 stores in New York, Pennsylvania, and Massachusetts to fill in its existing markets. Combined, the 31 stores are expected to add approximately $31 million in annualized sales, representing an expected sales mix of 60% service and 40% tires.

The company expects the acquisitions to be break even to slightly accretive in fiscal 2016.

Monro’s fiscal 2016 acquisitions completed year-to-date represent a total of $35 million in annualized sales and include the acquisition of Car-X, a chain of 146 franchised locations in ten states.

Outlook

For the third quarter of fiscal 2016, the company anticipates sales to be in the range of $247 to $254 million and comparable store sales to increase 2.0% to 4.0%. Monro expects diluted earnings per share for the third quarter to be between $.53 and $.58, as compared to $.49 in the prior year period. The third quarter fiscal 2016 earnings per share guidance assumes higher due diligence costs related to potential acquisitions.

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