This excerpt taken from the MNRO 10-K filed Jun 9, 2005.
Fiscal 2004 as Compared to Fiscal 2003
Sales for fiscal 2004 increased $21.4 million, or 8.3% to $279.5 million as compared to $258.0 million in fiscal 2003. The increase was due to an increase of approximately $10.9 million from stores added since March 31, 2002, of which the acquired Mr. Tire stores accounted for $3.5 million. Comparable store sales increased 4.7%. There were 306 selling days in fiscal years 2004 and 2003.
During the year, 40 stores were added and five were closed. At March 27, 2004, the Company had 595 stores and 10 kiosk locations in operation.
Management believes that the improvement in sales resulted from several factors aimed at driving store traffic, including an increase in the number of oil changes performed, an increase in scheduled maintenance services and an increase in commercial/fleet business. Price increases in areas such as shop supply and
environmental fees, as well as in several product categories, also contributed to the sales improvement. Additionally, after six fiscal years of declines in comparable store exhaust sales, exhaust sales leveled off in fiscal 2004. The exhaust decline had resulted primarily from manufacturers use (beginning in the mid-1980s and completed in the mid-1990s) of non-corrosive stainless steel exhaust systems on almost all new cars, which has extended the life of exhaust systems and resulted in declining exhaust sales.
Gross profit for fiscal 2004 was $114.0 million or 40.8% of sales, as compared with $105.0 million or 40.7% of sales for fiscal 2003. The improvement in gross profit as a percentage of sales is primarily attributable to a decline in technician labor costs as well as distribution and occupancy costs which are included in cost of sales. Technician labor costs decreased due to better operational control and improved productivity, as measured by sales per man hour. Since the Company began formally tracking this statistic over the last seven years, productivity has increased every year, and since fiscal 1998, is up 32%.
The decrease in distribution and occupancy costs as a percentage of sales is largely due to the buyout of the synthetic lease properties which occurred on June 27, 2003. As a result of this transaction, approximately $.8 million of expense, which formerly was recorded as rent expense and included in cost of sales, was recorded as interest expense during the year. There was also an additional $1.0 million of expense recorded as rent in the prior year which did not recur in FY04 due to: a) the buyout of several synthetic lease properties in March 2003 and b) a reduction in interest rates in FY04. The interest rate reduction occurred with the expiration of swap agreements mid-year. Additionally, there was a reduction in the spread over LIBOR which the Company pays, resulting from the Companys improved financial performance, as well as the elimination of the synthetic lease lessor. This reduction was partially offset by approximately $.4 million of additional depreciation recognized during the year, now that the related properties are recorded on the Companys balance sheet. Additionally, with strong comparable store sales, the Company was able to obtain some leverage in occupancy costs which are largely fixed expenses.
These decreases were partially offset by an increase in material usage partially related to a shift in mix, which includes a greater percentage of higher-cost tire sales, an increase in oil costs and an increase in parts purchased outside of the Companys normal distribution system (outside purchases). These parts carry much higher costs than parts which the Company purchases directly from manufacturers and distributes through its central distribution system. Due to parts proliferation and the Companys expansion into more services, having the correct mix of inventory in the stores is a challenge that the Company works very hard to master in order to control its cost of sales. While the Company, which purchases approximately 17% of parts outside its normal distribution system, has performed better than many of its competitors, which experience upwards of 50% outside purchases, it is not satisfied with these results and remains focused on reducing outside purchases from current levels.
Operating, selling, general and administrative expenses for fiscal 2004 increased by $3.7 million to $84.7 million and, as a percentage of sales, decreased by 1.1% as compared to fiscal 2003. The increase in expenditures is primarily due to increased store manager wages to improve the quality and retention of this highly important position for the Company, increased workers compensation costs, increased expense to comply with Sarbanes-Oxley requirements and increased utility costs. These increases were partially offset by a planned reduction in advertising expense as the Company shifted dollars from more expensive radio, newspaper and electronic advertising to the more efficient and cost-effective direct mail marketing. Additionally, there was a $1.6 million charge in FY03 for the vesting of performance-based options for the Companys Chief Executive Officer which did not recur in FY04. There was also a reduction in fiscal 2004 expense for field management.
Operating income in fiscal 2004 of $29.3 million, or 10.5% of sales, increased by $5.4 million from the fiscal 2003 level of $23.9 million, due to the factors discussed above.
Interest expense, net of interest income, decreased as a percent of sales from 1.0% in fiscal 2003 to .9% in fiscal 2004. The weighted average debt outstanding for the year ended March 27, 2004 increased by approximately $9.2 million from fiscal 2003. Largely offsetting this increase was a decrease in the weighted average interest rate for the year ended March 27, 2004 of approximately 1.3% from the rate of 6.8% for the year ended March 29, 2003, resulting in a slight increase in expense between the two years.
Other expense, net, for fiscal 2004 was $.1 million, consisting of $.3 million in amortization expense partially offset by $.2 million of gains on sale of fixed assets and miscellaneous income. In fiscal 2003 the Company reported other income, net, of $.2 million, consisting of amortization expense of $.3 million offset by gains on sale of fixed assets and miscellaneous income of $.5 million.
The Companys effective tax rate was 38% of pre-tax income in fiscal 2004 and 2003.
Net income for fiscal 2004 increased by $3.2 million, or 23.9%, to $16.5 million as compared to $13.3 million in fiscal 2003, due to the factors discussed.