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Monro: Comparable Store Tire Sales Down 4% in 3Q

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Monro Muffler Brake Inc.'s CEO and president John Van Heel insists there's just one reason for the company's third-quarter sales decline — a mild and slow start to winter. As to suggestions that there's anything else amiss, Van Heel told investors: "Everything else is just noise."

The company reported a drop in net income for the quarter, ended Dec. 26, 2015. The $15.2 million income was below the $16 million from the same period in 2015. Sales for the period increased 1%, from $236.6 million a year ago to $238.9 million.

Monro's income-to-sales ratio was 6.3% for the quarter.

Sales in new stores were the primary cause of the $2.4 million increase, and the company said sales from "recently acquired stores" made up $13 million of the total. Comparable store sales were down 2.5%.

"The decline in comparable store sales for the third quarter was primarily due to unseasonably warm weather in the company’s markets, which resulted in lower demand for tires and a decrease of 4% in comparable store tire sales," the company says.

John Van Heel, CEO and president, said the recent snowstorm that pummeled much of the East Coast already has helped the company's January figures.

“Our results for the third quarter are in line with our recent business update. Our weaker than expected earnings were the result of lower tire sales, particularly in November, driven by unseasonably warm weather across our markets.

"However, with recent winter weather in our markets, we are very encouraged to see that traffic and tire sales trends have rebounded, resulting in an approximate 10% increase in comparable store sales for our January fiscal month, which ended on January 23rd.”

Van Heel told investors, "Tires was absolutely the strongest category in January."

For non-tire categories, comparable store sales increases of approximately 6% for alignments and 2% for brakes and flat comparable store sales in exhaust, were offset by decreases of approximately 3% for both maintenance services and front end/shocks.

Monro opened seven locations and closed five locations during the third quarter, ending the quarter with 1,031 company-operated stores and 137 franchised Car-X stores.

Gross margin increased to 39.1% in the third quarter from 38.1% in the prior year period, due to the benefit of lower product costs as a percentage of sales and a lower mix of tire sales. Total operating expenses increased 7.5% to $66.9 million, or 28% of sales, as compared to $62.2 million, or 26.3% of sales for the same period of the prior year primarily as a result of higher due diligence costs and new stores. Total operating costs for the third quarter of fiscal 2016 include $2.4 million of due diligence costs, which represent approximately $.05 in earnings per share.

Operating income for the third quarter was $26.4 million, or 11.1% of sales, as compared to $28 million, or 11.8% of sales in the prior year period. Excluding due diligence costs, operating income would have been 12.1% of sales for the third quarter of this year. Interest expense was $3.9 million as compared to $2.9 million in the third quarter of fiscal 2015.

First Nine Month Results

For the nine-month period, sales increased 5.8% to $714.6 million from $675.4 million in the same period of the prior year. Comparable store sales decreased 30 basis points. However, operating margin expanded 40 basis points to 13.2% of sales. Net income for the first nine months of fiscal 2016 increased 7.4% to $52.9 million, or $1.59 per diluted share, as compared to $49.2 million, or $1.50 per diluted share in the comparable period of fiscal 2015.

Acquisitions Update

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 franchised locations in ten states. As previously announced, the company expects Car-X to be slightly accretive to earnings per share in fiscal 2016.

New Revolving Credit Facility

In January 2016, the company closed on an expanded $600 million, five-year revolving credit facility, a significant increase as compared to its prior $250 million facility. The expanded facility bears interest at 75 to 175 basis points over LIBOR and includes standard leverage and coverage covenants consistent with the prior facility. The increased borrowing capacity reflects the company’s financial strength and strong growth in sales and profitability.

Company Outlook

"Based on our year-to-date results, business and economic trends, and recently completed acquisitions, the company now anticipates fiscal 2016 sales to be in the range of $947 to $955 million versus the previous guidance range of $955 to $970 million. Fiscal 2016 sales guidance assumes flat comparable store sales to an increase of 1%.

For the fourth quarter of fiscal 2016, the company maintains its previous guidance of sales in the range of $232 to $240 million, assuming an increase in comparable store sales of 2% to 4%.

Van Heel said, “We believe that our strong business model will continue to drive long term sales and earnings growth. As we move forward, we remain very optimistic about the significant number of acquisition opportunities we see in the marketplace. Additionally, the increase in our credit facility from $250 million to $600 million provides us with the increased flexibility to pursue our acquisition strategy and other business opportunities even more aggressively.”

Monro operates  under the brand names of Monro Muffler Brake and Service, Mr. Tire, Tread Quarters Discount Tires, Autotire, Tire Warehouse, Tire Barn, Ken Towery’s Tire and Auto Care, The Tire Choice and Car-X.

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