MONRO, INC. (MNRO)

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

Executive Overview

We continue to make strategic investments to support our operating and financial model designed to drive sustainable sales and profit growth. We have done this through our investment strategy focused on improving guest experience, enhancing customer-centric engagement, optimizing product and service offerings, and accelerating productivity and team engagement.

Recent Developments

The Board of Directors of the Company appointed Peter D. Fitzsimmons to serve as the President and Chief Executive Officer as of March 28, 2025, immediately upon the departure of Michael T. Broderick on March 27, 2025. In connection with Mr. Fitzsimmons’ appointment, the Company also entered into a consulting agreement with AlixPartners, LLP (“AlixPartners”) as of March 28, 2025, pursuant to which AlixPartners will assess the Company’s operations to develop a plan to improve the Company’s financial performance.

We evaluated market segmentation and demographic data specific to geographic areas where our stores are located. As a result, we plan to close 145 underperforming stores in the first quarter of fiscal 2026 that we have identified to have failed to maintain an acceptable level of profitability. See additional discussion under Part II, Item 9B, “Other Information”.

On May 23, 2025, we entered into an amendment (the “Fifth Amendment”) to our Credit Facility, which, among other things, amends the terms of certain of the financial and restrictive covenants in the credit agreement to provide us with additional flexibility to operate our business from the first quarter of fiscal 2026 through the first quarter of fiscal 2027. See additional discussion under Part II, Item 9B, “Other Information”, and Note 6 to our consolidated financial statements.

Economic Conditions

The United States economy has experienced significant inflation during fiscal 2024 and fiscal 2025 and there are market expectations that consumer prices 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. 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, tariffs, changing interest rates, and geopolitical uncertainty, will result in an economic slowdown or recession in the United States. If that occurs, demand for our products and services may further decline, possibly significantly, which may significantly and adversely impact our business, results of operations and financial position.

Financial Summary

We operate on a 52/53-week fiscal year ending on the last Saturday in March. Fiscal year 2025 contained 52 weeks and fiscal 2024 contained 53 weeks. Any amounts noted as adjusted for days have been adjusted to remove the impact of the 53rd week in fiscal 2024.

Fiscal 2025 included the following notable items:

Diluted loss per common share was ($0.22).

Adjusted diluted earnings per share (“EPS”), a non-GAAP measure, were $0.48.

Sales decreased 6.4 percent, primarily due to lower overall comparable store sales resulting from lower store traffic and fewer selling days.

Comparable store sales decreased 5.3 percent from the prior year, or a decrease of 3.5 percent when adjusted for days.

Operating income of $12.6 million was 82.4 percent lower than the prior year, and was negatively impacted by an increase in store impairment charges of $22.4 million from the prior year.

Net loss was $5.2 million.

Adjusted net income, a non-GAAP measure, was $15.6 million.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Adjusted net income and adjusted diluted EPS, each of which is a measure not derived in accordance with generally accepted accounting principles in the 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 items that are not part of our core operations, such as store impairment charges, transition costs related to back-office optimization, management restructuring/transition costs, store closing costs, litigation reserve costs, costs related to shareholder matters from our equity capital structure recapitalization, net loss on subsequent inventory adjustment related to the prior year sale of wholesale tire and distribution assets, and a gain on sale of corporate headquarters net of closing and relocation costs. Reconciliations of these non-GAAP financial measures to GAAP measures are provided beginning on page 29 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.

Analysis of Results of Operations

We have elected to omit discussion on the earliest of the three years covered by the consolidated financial statements presented. The discussion of our fiscal 2024 performance compared to our fiscal 2023 performance and our financial condition as of March 30, 2024 is incorporated herein by reference to Part I, Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located in our Form 10-K for the fiscal year ended March 30, 2024, filed on May 28, 2024.

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 the Company’s consolidated financial statements for additional 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. There were 361 selling days in 2025 and 368 selling days in 2024.

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 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.

The sales decrease was primarily due to a decrease in comparable store sales resulting from lower store traffic and fewer selling days. Although overall comparable sales were down for the year ended March 29, 2025, we returned to year-over-year comparable store sales growth during the fourth quarter, adjusted for selling days. The following table shows the primary drivers of the change in sales between 2025 and 2024.

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(a)5.3% decrease represents comparable store sales unadjusted for days. Comparable store sales decreased by 3.5 percent when adjusted for selling days.

An increase in battery sales and front end/shocks for the year ended March 29, 2025 partially offset the decrease in sales in other categories. Broad-based economic pressures impacting consumers partly led to lower demand in tires and our higher-margin service categories during 2025. We expect the economic environment to continue to impact our customers into fiscal 2026. The following table shows the primary drivers of the comparable store product category sales change for 2025 compared to 2024.

(a)The comparable store product category sales change are adjusted for selling days.

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

Cost of Sales and Gross Profit

Gross profit, as a percentage of sales, decreased 50 basis points (“bps”) in 2025 as compared to the prior year. Material costs increased, as a percentage of sales, due primarily to mix within tires and increased levels of self-funded promotions. Occupancy costs, as a percentage of sales, increased as we lost leverage on these largely fixed costs. Partially offsetting this was a decrease in technician labor costs, as a percentage of sales, due primarily to improvements in labor productivity and efficiency.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Operating, Selling, General and Administrative Expenses

The increase of $24.4 million in operating, selling, general and administrative (“OSG&A”) expenses from the prior year is primarily due to an increase of $22.4 million in store impairment charges related to certain owned and leased assets. The following table shows the change in OSG&A expenses for 2025 compared to 2024.

Other Performance Factors

Net Interest Expense

Net interest expense of $18.9 million for 2025 decreased $1.1 million as compared to the prior year and remained at 1.6 percent as a percentage of sales. Weighted average debt outstanding for 2025 decreased by approximately $47 million as compared to 2024. This decrease is primarily related to lower finance lease debt related to our stores as well as lower debt outstanding under the Credit Facility. The weighted average interest rate increased approximately 20 basis points from the prior year due primarily to an increase in the Credit Facility’s floating borrowing rate.

Provision for Income Taxes

Our effective income tax rate was 12.4 percent for 2025 compared to 27.6 percent for 2024. The change in the effective tax rate for 2025 is primarily related to an increase in valuation allowances as well as the impact from other adjustments, none of which are significant, on the change in pre-tax (loss) income. See Note 8 to the Company’s consolidated financial statements for additional information.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Non-GAAP Financial Measures

In addition to reporting net income and diluted EPS, which are GAAP measures, this Form 10-K includes adjusted net income and adjusted diluted EPS, which are non-GAAP financial measures. We have included reconciliations to adjusted net income and adjusted diluted EPS from our most directly comparable GAAP measures, net income, and diluted EPS, below. Management views these non-GAAP financial measures as indicators to better assess comparability between periods because management believes these non-GAAP financial measures reflect our core business operations while excluding certain items that are not part of our core operations, such as store impairment charges, transition costs related to back-office optimization, management restructuring/transition costs, store closing costs, litigation reserve costs, costs related to shareholder matters from our equity capital structure recapitalization, net loss on subsequent inventory adjustment related to the prior year sale of wholesale tire and distribution assets, and a gain on sale of corporate headquarters net of closing and relocation costs.

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:

(a)Costs incurred in connection with restructuring and elimination of certain management positions.

(b)Amount includes a loss on subsequent inventory adjustments related to the prior year sale of wholesale tire and distribution assets.

(c)Amounts include the gain on sale of the corporate headquarters building net of associated closing and relocation costs.

Adjusted diluted EPS is summarized as follows:

(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.

The other adjustments to diluted EPS reflect adjusted effective tax rates of 25.0 percent and 26.5 percent for 2025 and 2024, respectively. This represents the tax effect of non-GAAP adjustments calculated at an estimated blended statutory tax rate. See adjustments from the Reconciliation of Adjusted Net Income table above for pre-tax amounts.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

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 each of the last three fiscal years. We believe the cash we generate from our operations will allow us to continue to support business operations, pay down debt and return cash to our shareholders through our dividend program.

In addition, because we believe a 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.

Dividends

We declared dividends of $1.12 per share totaling $34.9 million in 2025 and $35.5 million in 2024.

Share Repurchases

We returned $44.5 million to shareholders through share repurchases during fiscal 2024, inclusive of excise tax of $0.4 million. The excise tax is assessed at one percent of the fair market value of net stock repurchases after December 31, 2022. We did not repurchase any shares during fiscal 2025. For details regarding our share repurchase program, see Part II, Item 5, “Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this report and Note 16 to our consolidated financial statements.

Working Capital Management

As of March 29, 2025, we had a working capital deficit of $246.9 million, an increase from $201.9 million as of March 30, 2024. The overall working capital deficit is a result of our supply chain finance program. We have agreed to contractual payment terms and conditions with our suppliers. As part of our working capital management, we facilitate a voluntary supply chain finance program to provide our suppliers with the opportunity to sell receivables due from Monro to a participating financial institution subject to the independent discretion of both the supplier and participating financial institution. For details regarding our supplier finance program, see Note 15 to our consolidated financial statements.

Future Cash Requirements

We enter into contractual obligations in the ordinary course of business that may require future cash payments. Such obligations include, but are not limited to, debt service and leasing arrangements. The timing and nature of these obligations are expected to have an impact on our liquidity and capital requirements in future periods.

Contractual Obligations

(a) Finance and operating lease commitments represent future undiscounted lease payments and include $58.5 million and $34.9 million, respectively, related to options to extend lease terms that are reasonably certain of being exercised.

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.

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Summary of Cash Flows

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

Cash provided by operating activities

For 2025, cash provided by operating activities was $131.9 million, which consisted of net loss of $5.2 million, adjusted by non-cash charges of $93.8 million and by a change in operating assets and liabilities of $43.3 million. The non-cash charges included $69.4 million of depreciation and amortization and $24.4 million of long-lived asset impairment charges. The change in operating assets and liabilities was largely due to an increase in accounts payable of $70.7 million, partially offset by an increase in our inventory balance of $27.0 million.

For 2024, cash provided by operating activities was $125.2 million, which consisted of net income of $37.6 million, adjusted by non-cash charges of $86.3 million and by a change in operating assets and liabilities of $1.4 million. The non-cash charges were largely driven by $72.2 million of depreciation and amortization. The change in operating assets and liabilities was largely due to an increase in accrued expenses of $14.9 million, primarily related to timing of payroll and insurance payments. This source of cash was offset by our accounts payable and inventory balances being a use of cash of $9.8 million and $6.4 million, respectively.

Cash used for investing activities

For 2025, cash used for investing activities was $1.2 million. This was primarily due to cash used for capital expenditures, including property and equipment, of $26.4 million, offset by subsequent proceeds from the sale of our wholesale tire locations and distribution assets and from other property and equipment, including the proceeds related to the sale of our corporate headquarters, for $12.0 million and $13.1 million, respectively.

For 2024, cash used for investing activities was $2.0 million. This was primarily due to cash used for capital expenditures, including property and equipment of $25.5 million, offset by subsequent proceeds from the sale of our wholesale tire locations and distributions assets and from other property and equipment for $20.6 million and $2.9 million, respectively.

Cash used for financing activities

For 2025, cash used for financing activities was $116.5 million which was primarily due to payment on our Credit Facility, net of amounts borrowed during the period, of $40.8 million, as well as payment of finance lease principal and dividends of $39.8 million and $34.9 million, respectively.

For 2024, cash used for financing activities was $121.6 million which was primarily due to payment of finance lease principal and dividends of $39.0 million and $35.5 million, respectively, as well as payment on our Credit Facility, net of amounts borrowed during the period, of $3.0 million. Also, we used $44.0 million to repurchase common stock during 2024.

Credit Facility

Interest only is payable monthly throughout the term of our Credit Facility. The current borrowing capacity for the Credit Facility is $500 million and 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 2022 to provide us with additional flexibility to operate our business. The First Amendment amended the interest rate charged on borrowings to be based

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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 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 are in compliance with the financial covenants and other restrictions in the First Amendment and Credit Facility. 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.

On May 23, 2024, we entered into a Fourth Amendment to the Credit Facility (the “Fourth Amendment”). The Fourth Amendment, among other things, amended the terms of certain of the financial and restrictive covenants in the Credit Agreement, to provide us with additional flexibility to operate our business from the first quarter of fiscal 2025 through the fourth quarter of fiscal 2026 (“the Covenant Relief Period”). We may voluntarily exit the Covenant Relief Period at any time, which would revert the terms of the Credit Facility to the terms existing before the Fourth Amendment, with the exception of the modified definition of “EBITDAR,” described below.

During the Covenant Relief Period, the minimum interest coverage ratio was reduced from 1.55x to 1.00x to: (a) 1.25x to 1.00x from the first quarter of fiscal 2025 through the first quarter of fiscal 2026; (b) 1.35x to 1.00x from the second quarter of fiscal 2026 through the fourth quarter of fiscal 2026; and (c) 1.55x to 1.00x for the first quarter of fiscal 2027 and thereafter. During the Covenant Relief Period, the maximum ratio of adjusted debt to EBITDAR remained at 4.75x to 1.00x, except that, if we completed a qualified acquisition during the Covenant Relief Period, the maximum ratio would increase to 5.00x to 1.00x for a certain 12-month period after the qualified acquisition. In addition, the Fourth Amendment modified the definition of “EBITDAR” to permit add-backs relating to expenses, and restrict add-backs related to gains, associated with store closures of (a) all non-cash items and (b) cash items up to 20% of EBITDA from the first quarter of fiscal 2025 through the fourth quarter of fiscal 2026 and up to 15% of EBITDA from the first quarter of fiscal 2027 and thereafter. During the Covenant Relief Period, the interest rate spread charged on borrowings increased by 25 basis points. During the Covenant Relief Period, the restrictions on our ability to declare dividends were modified to reduce the cushion inside the threshold required for us to be able to declare dividends without restriction from 0.50x to 0.25x. In addition, during the Covenant Relief Period, we were required to have minimum liquidity of at least $400 million to declare dividends. We were prohibited from repurchasing our securities during the Covenant Relief Period if there were outstanding amounts under the Credit Facility immediately before or after giving effect to the repurchase. During the Covenant Relief Period, we were permitted to acquire stores or other businesses as long as we had minimum liquidity of at least $400 million after completing the acquisition.

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 $30.1 million outstanding letter of credit at March 29, 2025.

Mortgages and specific lease financing arrangements with other parties (with certain limitations) are permitted under the Credit Facility. Other specific terms and the maintenance of specified ratios are generally consistent with our prior financing agreement. Additionally, the Credit Facility is not secured by our real property, although we have agreed not to encumber our real property, with certain permissible exceptions.

We were in compliance with all debt covenants at March 29, 2025.

On May 23, 2025, we entered into the Fifth Amendment to our Credit Facility. The Fifth Amendment amends the terms of certain of the financial and restrictive covenants in the Credit Facility to provide us with additional flexibility to operate our business from the first quarter of fiscal 2026 through the first quarter of fiscal 2027 (the “Extended Covenant Relief Period”). We may voluntarily exit the Extended Covenant Relief Period at any time, which would revert the terms of the Credit Facility to the terms existing before the Fourth Amendment, with the exception of the modified definition of “EBITDAR,” described below.

During the Extended Covenant Relief Period, the minimum interest coverage ratio will be reduced from 1.55x to 1.00x to: (a) 1.15x to 1.00x from the first quarter of fiscal 2026 through the third quarter of fiscal 2026; (b) 1.25x to 1.00x from the fourth quarter of fiscal

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2026 through the first quarter of fiscal 2027; and (c) 1.55x to 1.00x for the second quarter of fiscal 2027 and thereafter. During the Extended Covenant Relief Period, the maximum ratio of adjusted debt to EBITDAR remains at 4.75x to 1.00x, except that, if we completed a qualified acquisition during the Extended Covenant Relief Period, the maximum ratio would increase to 5.00x to 1.00x for a certain 12-month period after the qualified acquisition. In addition to the Fourth Amendment modifications, the Fifth Amendment further modifies the definition of “EBITDAR” to permit add-backs relating to non-cash impairment and other expenses, with the restriction for add-backs of certain cash expense items up to 20% of EBITDA from the first quarter of fiscal 2026 through the fourth quarter of fiscal 2026 and up to 15% of EBITDA from the first quarter of fiscal 2027 and thereafter.

During the Extended Covenant Relief Period, the interest rate spread charged on borrowings is 225 basis points.

During the Extended Covenant Relief Period, the restrictions on our ability to declare dividends were modified to reduce the cushion inside the threshold required for us to be able to declare dividends without restriction from 0.50x to 0.25x. In addition, during the Extended Covenant Relief Period, we must have minimum liquidity of at least $300 million to declare dividends. We are prohibited from repurchasing our securities during the Extended Covenant Relief Period if there are outstanding amounts under the Credit Facility immediately before or after giving effect to the repurchase. During the Extended Covenant Relief Period, we may acquire stores or other businesses as long as we have minimum liquidity of at least $300 million after completing the acquisition.

In addition, the Fifth Amendment permanently reduces the Credit Facility from $600 million to $500 million.

Except as amended by the First Amendment, Second Amendment, Third Amendment, Fourth Amendment and Fifth Amendment, the remaining terms of the Credit Facility remain in full force and effect.

As of May 16, 2025, we had approximately $5.2 million in cash on hand. In addition, we had $499.9 million available under the Credit Facility as of May 16, 2025, subject to compliance with our covenants.

We believe that our sources of liquidity, namely cash flow from operations, availability under our Credit Facility, and cash and equivalents on hand, will continue to be adequate to meet our contractual obligations, working capital and capital expenditure needs, finance acquisitions, fund debt maturities, and pay dividends for at least the next 12 months and the foreseeable future.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and apply judgments that affect the reported amounts. In Note 1 to the Company’s consolidated financial statements, we describe the significant accounting policies used in preparing the consolidated financial statements. Our management believes that the accounting estimates listed below are those that are most critical to the portrayal of our financial condition and results of operations, and that require management’s most difficult, subjective, and complex judgments in estimating the effect of inherent uncertainties.

Valuation of Long-Lived Assets

We assess potential impairments to our long-lived assets, which include property and equipment and Right of Use (“ROU”) assets, whenever events or changes in circumstances indicate that the carrying value of an asset group may not be recoverable. Long-lived assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. The carrying value of an asset group is considered impaired when its carrying value exceeds its estimated undiscounted future cash flows. The amount of any impairment loss recorded is calculated as the excess of the asset group’s carrying value over its fair value. Fair value of the assets is determined based on the highest and best use of the asset group, considering external market participant assumptions. During the fourth quarter, we consider changes in the actual and forecasted financial performance of certain asset groups and we have determined such events indicated that a triggering event occurred for certain asset groups. We assessed the recoverability of certain asset groups through the use of an undiscounted cash flow model, which involved significant judgement in a number of assumptions including projected revenues and operating income. We assessed the fair value of certain asset groups through the use of a discounted cash flow model, which involved significant judgement in a number of assumptions, including projected revenues, operating income, comparable market rents, and estimated selling price of owned stores. Such indicators may include, among others: a significant decline in our expected future cash flows; changes in expected useful life; unanticipated competition; slower growth rates, ongoing maintenance and improvements of the assets, or changes in operating performance. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

Valuation of Goodwill

We assess potential impairment to our goodwill on an annual basis. Goodwill is also tested whenever events and circumstances indicate that goodwill may be impaired. Any excess goodwill resulting from the impairment test must be written off in the period of determination.  When a triggering event occurs, we perform quantitative analysis for goodwill impairment testing and base the fair value of our reporting unit on consideration of various valuation methodologies, including projecting future cash flows discounted at rates commensurate with the risks involved (“DCF”). The forecasted cash flows are based on current plans and for years beyond that plan, the estimates are based on assumed growth rates. The calculation of fair value is based on estimates including revenue projections, terminal values, EBITDA margin projections, estimated tax rates, estimated capital expenditures, estimated working capital, guideline public company revenue and EBITDA multiples, guideline transaction revenue multiples, market participation acquisition premiums and discount rate. We believe that our assumptions are consistent with the plans and estimates used to manage the underlying businesses. The discount rate, which is intended to reflect the risks inherent in future cash flow projections, used in a DCF are based on estimates of the weighted-average cost of capital of a market participant. Such estimates are derived from our analysis of peer companies and consider the industry weighted average return on debt and equity from a market participant perspective. Any adverse change in these factors could determine goodwill impairment and could have a material impact on our consolidated financial statements.

Insurance Reserves

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

Income Taxes

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

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

We measure and recognize the tax benefit from an uncertain tax position taken or expected to be taken on an income tax return based on the largest benefit that we determine is more likely than not of being realized upon settlement. We use significant judgment and estimates in evaluating our tax positions. Due to the complexity of some of these uncertain tax positions, the ultimate resolution may result in an actual tax liability that differs from our estimated tax liabilities for unrecognized tax benefits and our effective tax rate may be materially impacted. Income taxes are described further in Note 8 of the Company’s consolidated financial statements.

Accounting Standards

See “Recent Accounting Pronouncements” in Note 1 to the Company’s consolidated financial statements for a discussion of the impact of recently issued accounting standards on our consolidated financial statements as of March 29, 2025 and for the year then ended, as well as the expected impact on the consolidated financial statements for future periods.

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

Executive Overview

We continue to make strategic investments to support our operating and financial model designed to drive sustainable sales and profit growth. We have done this through our investment strategy focused on improving guest experience, enhancing customer-centric engagement, optimizing product and service offerings, and accelerating productivity and team engagement, as well as our growth strategy, including executing on accretive acquisition opportunities.

Recent Developments

On May 23, 2024, we entered into a Fourth Amendment to our Credit Facility, which, among other things, amends the terms of certain of the financial and restrictive covenants in the credit agreement to provide us with additional flexibility to operate our business from the first quarter of fiscal 2025 through the fourth quarter of fiscal 2026. See additional discussion under Part II, Item 9B, “Other Information”, and Note 6 to our consolidated financial statements.

2023 Divestiture

On June 17, 2022, we completed the sale of assets relating to our wholesale tire operations and internal tire distribution operations to ATD. The total purchase price was $102 million, consisting of $62 million paid by ATD at closing, of which $5 million was held in escrow, and the remaining $40 million to be paid quarterly over approximately three years based on our tire purchases from or through ATD pursuant to a distribution and fulfillment agreement. For details regarding the sale and subsequent proceeds, see Note 2 to our consolidated financial statements.

Economic Conditions

The United States economy has experienced high inflation during fiscal 2023 and fiscal 2024 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 fiscal 2024 and interest rate changes 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, changing interest rates, and geopolitical uncertainty, 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.

Financial Summary

We operate on a 52/53-week fiscal year ending on the last Saturday in March. Fiscal year 2024 contained 53 weeks and fiscal 2023 contained 52 weeks. Any amounts noted as adjusted for days have been adjusted to remove the impact of the 53rd week in fiscal 2024.

Fiscal 2024 included the following notable items:

Diluted earnings per common share (“EPS”) were $1.18.

Adjusted diluted EPS, a non-GAAP measure, were $1.33.

Sales decreased 3.7 percent, primarily due to closed stores and lower overall comparable store sales.

Comparable store sales decreased 2.0 percent from the prior year, or a decrease of 3.9 percent when adjusted for days.

Operating income of $71.4 million was 10.4 percent lower than the prior year.

Net income was $37.6 million.

Adjusted net income, a non-GAAP measure, was $42.4 million.

Note: Amounts may not foot due to rounding.

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Adjusted net income and adjusted diluted EPS, each of which is a measure not derived in accordance with generally accepted accounting principles in the 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 costs related to shareholder matters from our equity capital structure recapitalization, transition costs related to back-office optimization, corporate headquarters relocation costs, and items related to store closings, as well as acquisition initiatives. Reconciliations of these non-GAAP financial measures to GAAP measures are provided beginning on page 27 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.

Analysis of Results of Operations

We have elected to omit discussion on the earliest of the three years covered by the consolidated financial statements presented. The discussion of our fiscal 2023 performance compared to our fiscal 2022 performance and our financial condition as of March 25, 2023 is incorporated herein by reference to Part I, Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located in our Form 10-K for the fiscal year ended March 25, 2023, filed on May 22, 2023.

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 the Company’s consolidated financial statements for additional 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 368 selling days in 2024 and 361 selling days in 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 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.

The sales decrease was due to a decrease in sales from closed stores from the prior year, as well as a decrease in comparable store sales. The decrease in sales from closed stores was driven primarily by the sale of our wholesale tire locations, representing approximately $23.9 million in sales for fiscal 2023. The decrease in comparable store sales is primarily driven by a strained low-to-middle income consumer that disproportionately traded-down to tires at opening price points as the industry worked to clear-through an oversupply of lower-margin tires. Additionally, milder weather contributed to the general tire deferral cycle. This put pressure on overall tire units industry-wide across all regions of the country. This led to weaker store traffic, which was not supportive to sales of our higher-margin service categories. These decreases were partially offset by an increase in sales from new stores and franchise royalties. The following table shows the primary drivers of the change in sales between 2024 and 2023.

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(a)The change in closed store sales is primarily due to sales from the wholesale locations sold to American Tire Distributors (“ATD”).

(b)Comparable store sales decreased by 3.9 percent when adjusted for days.

(c)Sales from the fiscal 2023 acquisitions primarily represent the change.

Broad-based inflationary pressures impacting consumers partly led to lower demand in tires and our higher margin service categories during fiscal 2024. We expect the inflationary environment to continue to impact our customers in fiscal 2025.

(a)The comparable store product category sales change for the year ended March 30, 2024 are adjusted for days.

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

Cost of Sales and Gross Profit

Gross profit, as a percentage of sales, increased 100 basis points (“bps”) in 2024 as compared to the prior year. Retail material costs, as a percentage of sales, decreased due primarily to tire mix improvement and opportunistic pricing actions. Partially offsetting this increase in gross profit, as a percentage of sales, were increased retail occupancy costs, as a percentage of sales, as we lost leverage on these largely fixed costs with lower overall comparable store sales, as well as an increase in technician labor costs, as a percentage of sales, due to the impact from wage inflation.

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Operating, Selling, General and Administrative Expenses

The increase of $4. 3 million in operating, selling, general and administrative (“OSG&A”) expenses from the prior year is primarily due to an increase in OSG&A expenses from the gain on the sale to ATD of our wholesale tire locations and distribution assets, net of closing costs and costs associated with the closing of a related warehouse and inventory adjustments during the prior year, comparable and new stores, store impairment charges, as well as transition costs related to back-office optimization. Partially offsetting these increases were decreases in costs related to closed stores, litigation reserve/settlement costs and other non-recurring costs.

Other Performance Factors

Net Interest Expense

Net interest expense of $20.0 million for 2024 decreased $3.2 million as compared to the prior year and decreased as a percentage of sales from 1.7 percent to 1.6 percent. Weighted average debt outstanding for 2024 decreased by approximately $105 million as compared to 2023. This decrease is primarily related to lower finance lease debt related to our stores, as well as a decrease in debt outstanding under our Credit Facility. The weighted average interest rate increased approximately 70 basis points from the prior year due primarily to an increase in the Credit Facility’s floating borrowing rates.

Provision for Income Taxes

Our effective income tax rate was 27.6 percent for 2024 compared to 31.7 percent for 2023. The effective income tax rate for 2023 was higher by 4.1 percent, primarily due to 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. See Note 8 to the Company’s consolidated financial statements for additional information.

Non-GAAP Financial Measures

In addition to reporting net income and diluted EPS, which are GAAP measures, this Form 10-K includes adjusted net income and adjusted diluted EPS, which are non-GAAP financial measures. We have included reconciliations to adjusted net income and adjusted diluted EPS from our most directly comparable GAAP measures, net income, and diluted EPS, below. Management views these non-GAAP financial measures as indicators to better assess comparability between periods because management believes these non-GAAP financial measures reflect our core business operations while excluding certain non-recurring items, such as costs related to shareholder matters from our equity capital structure recapitalization, transition costs related to back-office optimization, corporate headquarters relocation costs, and items related to store closings, as well as acquisition initiatives.

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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:

(a)Amounts include a loss on subsequent inventory adjustments in fiscal 2024, and gain on sale of related warehouse, net of associated closing costs, in fiscal 2023.

(b)Costs incurred in connection with restructuring and elimination of certain management positions.

(c)Certain discrete tax 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.

Adjusted diluted EPS is summarized as follows:

(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 certain discrete tax items for 2023 are tax affected. The other adjustments to diluted EPS reflect adjusted effective tax rates of 26.5 percent and 25.6 percent for 2024 and 2023, respectively. These adjusted effective tax rates exclude the income tax impacts from share-based compensation and for 2024 and 2023 and exclude certain discrete tax items for 2023. See adjustments from the Reconciliation of Adjusted Net Income table above for pre-tax amounts.

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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 each of the last three fiscal years. We believe 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 and return cash to our shareholders through our dividend 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.

Dividends

We paid cash dividends of $1.12 per share totaling $35.5 million in 2024 and $36.4 million in 2023.

Share Repurchases

We returned $44.5 million to shareholders through share repurchases during fiscal 2024, inclusive of excise tax of $0.4 million. The excise tax is assessed at one percent of the fair market value of net stock repurchases after December 31, 2022. For details regarding our share repurchase program, see Part II, Item 5, “Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this report and to our consolidated financial statements.

Working Capital Management

As of March 30, 2024, we had a working capital deficit of $201.9 million, an increase from $190.7 million as of March 25, 2023. The overall working capital deficit is a result of our supply chain finance program. We have agreed to contractual payment terms and conditions with our suppliers. As part of our working capital management, we facilitate a voluntary supply chain finance program to provide our 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 15 to our consolidated financial statements.

Future Cash Requirements

We enter into contractual obligations in the ordinary course of business that may require future cash payments. Such obligations include, but are not limited to, debt service and leasing arrangements. The timing and nature of these obligations are expected to have an impact on our liquidity and capital requirements in future periods.

Contractual Obligations

(a)Finance and operating lease commitments represent future undiscounted lease payments and include $77.2 million and $49.8 million, respectively, related to options to extend lease terms that are reasonably certain of being exercised.

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.

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Summary of Cash Flows

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

Cash provided by operating activities

For 2024, cash provided by operating activities was $125.2 million, which consisted of net income of $37.6 million, adjusted by non-cash charges of $86.3 million and by a change in operating assets and liabilities of $1.4 million. The non-cash charges were largely driven by $72.2 million of depreciation and amortization. The change in operating assets and liabilities was largely due to an increase in accrued expenses of $14.9 million, primarily related to timing of payroll and insurance payments. This source of cash was offset by our accounts payable and inventory balances being a use of cash of $9.8 million and $6.4 million, respectively.

For 2023, cash provided by operating activities was $215.0 million, which consisted of net income of $39.0 million, adjusted by non-cash charges of $80.9 million and by a change in operating assets and liabilities of $95.1 million. The non-cash charges were largely driven by $77.0 million of depreciation and amortization. The change in operating assets and liabilities was largely due to our supply chain finance program being a source of cash as we improved our cash flow by $120.5 million. This source of cash was partially offset by our inventory balance being a use of cash of $18.2 million as well as our federal and state income taxes payable being a use of cash of $2.4 million.

Cash used for / provided by investing activities

For 2024, cash used for investing activities was $2.0 million. This was primarily due to cash used for capital expenditures, including property and equipment, of $25.5 million, offset by subsequent proceeds from the sale of our wholesale tire locations and distribution assets and from other property and equipment for $20.6 million and 2.9 million, respectively.

For 2023, cash provided by investing activities was $26.5 million. This was primarily due to cash from the sale of our wholesale tire locations and distribution assets and from other property and equipment for $65.3 million and $7.2 million, respectively, partially offset by cash used for capital expenditures, including property and equipment, and acquisitions of $39.0 million and $6.7 million, respectively.

Cash used for financing activities

For 2024, cash used for financing activities was $121.6 million which was primarily due to the payment of finance lease principal and dividends of $39.0 million and $35.5 million, respectively, as well as payment on our Credit Facility, net of amounts borrowed during the period, of $3.0 million. Also, we used $44.0 million to repurchase common stock during 2024.

For 2023, cash used for financing activities was $244.6 million which was primarily due to payment on our Credit Facility, net of amounts borrowed during the period, of $71.5 million, as well as payment of finance lease principal and dividends of $39.5 million and $36.4 million, respectively. Also, we used $96.9 million to repurchase common stock during 2023.

Credit Facility

Interest only is payable monthly throughout the term of our Credit Facility. 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.

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 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.

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Additionally, during the same 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 are in compliance with the financial covenants and other restrictions in the First Amendment and Credit Facility. 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.

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 $30.1 million outstanding letter of credit at March 30, 2024.

Mortgages and specific lease financing arrangements with other parties (with certain limitations) are permitted under the Credit Facility. Other specific terms and the maintenance of specified ratios are generally consistent with our prior financing agreement. Additionally, the Credit Facility is not secured by our real property, although we have agreed not to encumber our real property, with certain permissible exceptions.

We were in compliance with all debt covenants at March 30, 2024.

On May 23, 2024, we entered into an amendment (the “Fourth Amendment”) to our Credit Facility. The Fourth Amendment amends the terms of certain of the financial and restrictive covenants in the Credit Facility to provide us with additional flexibility to operate our business from the first quarter of fiscal 2025 through the fourth quarter of fiscal 2026 (the “Covenant Relief Period”). We may voluntarily exit the Covenant Relief Period at any time, which would revert the terms of the Credit Facility to the terms existing before the Fourth Amendment, with the exception of the modified definition of “EBITDAR,” described below.

During the Covenant Relief Period, the minimum interest coverage ratio will be reduced from 1.55x to 1.00x to: (a) 1.25x to 1.00x from the first quarter of fiscal 2025 through the first quarter of fiscal 2026; (b) 1.35x to 1.00x from the second quarter of fiscal 2026 through the fourth quarter of fiscal 2026; and (c) 1.55x to 1.00x for the first quarter of fiscal 2027 and thereafter. During the Covenant Relief Period, the maximum ratio of adjusted debt to EBITDAR remains at 4.75x to 1.00x, except that, if we completed a qualified acquisition during the Covenant Relief Period, the maximum ratio would increase to 5.00x to 1.00x for a certain 12-month period after the qualified acquisition. In addition, the Fourth Amendment modifies the definition of “EBITDAR” to permit add-backs relating to expenses, and restrict add-backs related to gains, associated with store closures of (a) all non-cash items and (b) cash items up to 20% of EBITDA from the first quarter of fiscal 2025 through the fourth quarter of fiscal 2026 and up to 15% of EBITDA from the first quarter of fiscal 2027 and thereafter.

During the Covenant Relief Period, the interest rate spread charged on borrowings increases by 25 basis points.

During the Covenant Relief Period, the restrictions on our ability to declare dividends were modified to reduce the cushion inside the threshold required for us to be able to declare dividends without restriction from 0.50x to 0.25x. In addition, during the Covenant Relief Period, we must have minimum liquidity of at least $400 million to declare dividends. We are prohibited from repurchasing our securities during the Covenant Relief Period if there are outstanding amounts under the Credit Facility immediately before or after giving effect to the repurchase. During the Covenant Relief Period, we may acquire stores or other businesses as long as we have minimum liquidity of at least $400 million after completing the acquisition.

Except as amended by the First Amendment, Second Amendment, Third Amendment and Fourth Amendment, the remaining terms of the Credit Facility remain in full force and effect.

As of May 17, 2024, we had approximately $6.9 million in cash on hand. In addition, we had $472.9 million available under the Credit Facility as of May 17, 2024.

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We believe that our sources of liquidity, namely cash flow from operations, availability under our Credit Facility, and cash and equivalents on hand, will continue to be adequate to meet our contractual obligations, working capital and capital expenditure needs, finance acquisitions, fund debt maturities, and pay dividends for at least the next 12 months and the foreseeable future.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and apply judgments that affect the reported amounts. In Note 1 to the Company’s consolidated financial statements, we describe the significant accounting policies used in preparing the consolidated financial statements. Our management believes that the accounting estimates listed below are those that are most critical to the portrayal of our financial condition and results of operations, and that require management’s most difficult, subjective, and complex judgments in estimating the effect of inherent uncertainties.

Business Combinations

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

Valuation of Long-Lived Assets

We assess potential impairments to our long-lived assets, which include property and equipment and ROU assets, whenever events or changes in circumstances indicate that the carrying value of an asset group may not be recoverable. Long-lived assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. The carrying value of an asset group is considered impaired when its carrying value exceeds its estimated undiscounted future cash flows. The amount of any impairment loss recorded is calculated as the excess of the asset group’s carrying value over its fair value. Fair value of the assets is determined based on the highest and best use of the asset group, considering external market participant assumptions. During the fourth quarter, we consider changes in the actual and forecasted financial performance of certain asset groups and we have determined such events indicated that a triggering event occurred for certain asset groups. We assessed the recoverability of certain asset groups through the use of an undiscounted cash flow model, which involved significant judgement in a number of assumptions including projected revenues and operating income. Such indicators may include, among others: a significant decline in our expected future cash flows; changes in expected useful life; unanticipated competition; slower growth rates, ongoing maintenance and improvements of the assets, or changes in operating performance. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements.

Insurance Reserves

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

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Income Taxes

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

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

We measure and recognize the tax benefit from an uncertain tax position taken or expected to be taken on an income tax return based on the largest benefit that we determine is more likely than not of being realized upon settlement. We use significant judgment and estimates in evaluating our tax positions. Due to the complexity of some of these uncertain tax positions, the ultimate resolution may result in an actual tax liability that differs from our estimated tax liabilities for unrecognized tax benefits and our effective tax rate may be materially impacted. Income taxes are described further in Note 8 of the Company’s consolidated financial statements.

Accounting Standards

See “Recent Accounting Pronouncements” in Note 1 to the Company’s consolidated financial statements for a discussion of the impact of recently issued accounting standards on our consolidated financial statements as of March 30, 2024 and for the year then ended, as well as the expected impact on the consolidated financial statements for future periods.

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

Executive Overview

We continue to make strategic investments to support our operating and financial model designed to drive sustainable sales and profit growth. We have done this through our investment strategy focused on improving guest experience, enhancing customer-centric engagement, optimizing product and service offerings, and accelerating productivity and team engagement, as well as our growth strategy, including executing on accretive acquisition opportunities. During fiscal 2023, we:

Invested in our team, including incremental investment in our technician labor and wages to support topline sales growth;

Offered attractive price points on key items to grow market share and capture new customers for the long-term; and

Opened six stores through acquisition.

Recent Developments

On May 12, 2023, we entered into a reclassification agreement (the “Reclassification Agreement”) with the holders of our Class C Preferred Stock (the “Class C Holders”) in support of our plan to reclassify our equity capital structure to eliminate the Class C Preferred Stock, subject to shareholder approval.

The Reclassification Agreement provides that, subject to the satisfaction of certain conditions, we will file amendments to our certificate of incorporation (the “Certificate of Incorporation”) to create a mandatory conversion of any outstanding shares of Class C Preferred Stock prior to an agreed sunset date. In exchange for this sunset of the Class C Preferred Stock, the conversion rate of Class C Preferred Stock will be adjusted so that each share of Class C Preferred Stock will convert into 61.275 shares of common stock (the “adjusted conversion rate”), an increase from the current conversion rate of 23.389 shares of common stock for each share of Class C Preferred Stock under the Certificate of Incorporation. At the end of the sunset period, all shares of Class C Preferred Stock remaining outstanding will be automatically converted into shares of common stock at the adjusted conversion rate. The Reclassification Agreement also provides that, during the sunset period, the Class C Holders will have the right to appoint one member of the board of directors. This designee is expected to be Peter J. Solomon, who is one of the Company’s current directors and one of the Class C Holders.

2023 Divestiture

On June 17, 2022, we completed the sale of assets relating to our wholesale tire operations and internal tire distribution operations to 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 $8.7 million was received during fiscal 2023. For details regarding the sale, see Note 2 to our consolidated financial statements. During fiscal 2023, 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.

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.

Financial Summary

Fiscal 2023 included the following notable items:

Diluted earnings per common share (“EPS”) were $1.20.

Adjusted diluted EPS, a non-GAAP measure, were $1.36.

Sales decreased 2.5 percent, primarily due to lower overall tire sales because of the sale of our wholesale operations.

Comparable store sales increased 2.8 percent from the prior year, driven primarily by an approximately 11 percent comparable store sales increase in approximately 300 of our small or underperforming stores.

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Operating income of $79.8 million was 21.3 percent lower than the prior year, driven primarily by a decrease in gross profit.

Net income was $39.0 million.

Adjusted net income, a non-GAAP measure, was $44.5 million.

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 generally accepted accounting principles in the 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 costs related to shareholder matters from our equity capital structure recapitalization, litigation reserves/settlement costs, and items related to store impairment charges and closings, as well as Monro.Forward or acquisition initiatives. Reconciliations of these non-GAAP financial measures to GAAP measures are provided beginning on page 27 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.

Analysis of Results of Operations

We have elected to omit discussion on the earliest of the three years covered by the consolidated financial statements presented. The discussion of our fiscal 2022 performance compared to our fiscal 2021 performance and our financial condition as of March 26, 2022 is incorporated herein by reference to Part I, Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located in our Form 10-K for the fiscal year ended March 26, 2022, filed on May 23, 2022.

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 the Company’s consolidated financial statements for additional 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 361 selling days in both 2023 and 2022.

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 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.

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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 2023. The decrease in sales in 2023 from the prior year for the wholesale locations was approximately $90.6 million. This was partially offset by an increase in comparable store sales from an increase in average ticket amount across product categories and price points, primarily due to a comparable store sales increase in approximately 300 of our small or underperforming stores, and an increase in sales from new stores. The following table shows the primary drivers of the change in sales between 2023 and 2022.

(a)The change in closed store sales is primarily due to sales from the wholesale locations sold to ATD.

(b)On a comparable store sales basis, comparable store sales increased by 2.8 percent.

(c)On a comparable store sales basis, comparable store sales at our retail locations increased by 3.5 percent.

(d)Sales from the fiscal 2023 acquisitions and fiscal 2022 acquisitions represent the change.

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 fiscal 2023. We expect the inflationary environment to continue to impact our customers in fiscal 2024.

(a)Comparable store tire sales increased six percent at our retail locations during 2023.

For 2022, 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 COVID-19 pandemic had a more volatile impact on demand.

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

(a)Includes six stores opened related to the 2023 acquisitions.

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Cost of Sales and Gross Profit

The decrease in gross profit, as a percentage of sales, of 100 basis points (“bps”) for 2023 as compared to the prior year was primarily due to an increase in retail material costs, which increased as a percentage of sales, mainly a result of a shift to a higher mix of tire sales at our retail locations and customers trading down to opening price point tires. 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 continued our 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.

Operating, Selling, General and Administrative Expenses

The decrease of $4.1 million in operating, selling, general and administrative (“OSG&A”) expenses from the prior year is primarily due to lower expenses from 16 retail stores closed and our wholesale tire locations that were sold as well as decreased expenses from comparable stores mainly a result of cost control. The decrease in OSG&A expenses is also partially due to the gain on the sale of our wholesale tire locations and tire distribution assets, as well as the gain on the sale of related warehouses, net of associated closing costs, and a decrease in litigation reserve/settlement costs. Partially offsetting these decreases were increased expenses from 11 new stores, a full year of expenses for stores acquired in 2022, an increase in costs incurred in connection with restructuring and elimination of certain executive management positions upon completion of the divestiture to ATD, and an increase in costs related to shareholder matters.

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Other Performance Factors

Net Interest Expense

Net interest expense of $23.2 million for 2023 decreased $1.5 million as compared to the prior year and decreased as a percentage of sales from 1.8 percent to 1.7 percent. Weighted average debt outstanding for 2023 decreased by approximately $98 million as compared to 2022. This decrease is primarily related to a decrease in debt outstanding under our Credit Facility. The weighted average interest rate increased approximately 50 basis points from the prior year due primarily to an increase in the Credit Facility’s floating borrowing rates.

Provision for Income Taxes

Our effective income tax rate was 31.7 percent for 2023 compared to 20.3 percent for 2022. The effective income tax rate for 2023 was higher by 5.3 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 2022 was lower by 4.0 percent due to the difference in statutory tax rates from a loss year to years in which such net operating loss may be carried back. Additionally, the increase in our effective income tax rate for 2023 over the prior year was also due to other state income tax impacts from the divestiture. See Note 8 to the Company’s consolidated financial statements for additional information.

Non-GAAP Financial Measures

In addition to reporting net income and diluted EPS, which are GAAP measures, this Form 10-K includes adjusted net income and adjusted diluted EPS, which are non-GAAP financial measures. We have included reconciliations to adjusted net income and adjusted diluted EPS from our most directly comparable GAAP measures, net income, and diluted EPS, below. Management views these non-GAAP financial measures as indicators to better assess comparability between periods because management believes these non-GAAP financial measures reflect our core business operations while excluding certain non-recurring items, such as costs related to shareholder matters from our equity capital structure recapitalization, litigation reserves/settlement costs, and items related to store impairment charges and 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:

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

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

(c)Income tax benefit related to net operating loss carryback adjustment that reflects the difference in statutory tax rates from a loss year to years in which such net operating loss may be carried back.

(d)Certain discrete tax 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.

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Adjusted diluted EPS is summarized as follows:

(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 certain discrete tax items for 2023 and income tax benefit related to net operating loss carryback adjustment for 2022 to each of net income and diluted EPS are tax affected. The other adjustments to diluted EPS reflect adjusted effective tax rates of 25.6 percent and 24.1 percent for 2023 and 2022, respectively. These adjusted effective tax rates exclude the income tax impacts from share-based compensation and for 2023 and 2022 exclude certain discrete tax items and differences in statutory tax rates for net operating loss carrybacks, respectively. See 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 each of 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.

Dividends

We paid cash dividends totaling $36.4 million ($1.12 per share) in 2023 and $34.7 million ($1.02 per share) in 2022, a per share increase of 10 percent. We have paid dividends annually since fiscal 2006 and it is our intent to continue to do so in the future.

Share Repurchases

We returned $96.9 million to shareholders through share repurchases during fiscal 2023. For details regarding our share repurchase program, see Part II, Item 5, “Market for the Company's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this report and Note 15 to our consolidated financial statements.

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Working Capital Management

As of March 25, 2023, we had a working capital deficit of $190.7 million, an increase from $76.5 million as of March 26, 2022. The increase was driven by an increase in accounts payable as a result of certain of our suppliers that participate in our supply chain finance program. We have agreed to contractual payment terms and conditions with our suppliers. As part of our working capital management, we facilitate a voluntary supply chain finance program to provide our 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.

Future Cash Requirements

We enter into contractual obligations in the ordinary course of business that may require future cash payments. Such obligations include, but are not limited to, debt service and leasing arrangements. The timing and nature of these obligations are expected to have an impact on our liquidity and capital requirements in future periods.

Contractual Obligations

(a)Finance and operating lease commitments represent future undiscounted lease payments and include $88.5 million and $57.6 million, respectively, related to options to extend lease terms that are reasonably certain of being exercised.

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.

Summary of Cash Flows

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

Cash provided by operating activities

For 2023, cash provided by operating activities was $215.0 million, which consisted of net income of $39.0 million, adjusted by non-cash charges of $80.9 million and by a change in operating assets and liabilities of $95.1 million. The non-cash charges were largely driven by $77.0 million of depreciation and amortization. The change in operating assets and liabilities was largely due to our supply chain finance program being a source of cash as we improved our cash flow by $120.5 million. This source of cash was partially offset by our inventory balance being a use of cash of $18.2 million as well as our federal and state income taxes payable being a use of cash of $2.4 million.

For 2022, cash provided by operating activities was $173.8 million, which consisted of net income of $61.6 million, adjusted by non-cash charges of $99.3 million and by a change in operating assets and liabilities of $12.8 million. The non-cash charges were largely driven by $81.2 million of depreciation and amortization. The change in operating assets and liabilities was largely due to our federal and state income taxes payable being a source of cash of $13.8 million due primarily to an income tax refund that was received.

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Cash provided by / used for investing activities

For 2023, cash provided by investing activities was $26.5 million. This was primarily due to cash from the sale of our wholesale tire locations and distribution assets and from other property and equipment for $65.3 million and $7.2 million, respectively, partially offset by cash used for capital expenditures, including property and equipment, and acquisitions of $39.0 million and $6.7 million, respectively.

For 2022, cash used for investing activities was $109.8 million. This was primarily due to cash used for acquisitions and capital expenditures, including property and equipment, of $83.3 million and $27.8 million, respectively. Included in the $83.3 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 2023, cash used for financing activities was $244.6 million which was primarily due to payment on our Credit Facility, net of amounts borrowed during the period, of $71.5 million, as well as payment of finance lease principal and dividends of $39.5 million and $36.4 million, respectively. Also, we used $96.9 million to repurchase common stock during 2023.

For 2022, cash used for financing activities was $86.0 million which was primarily due to payment of finance lease principal and dividends of $39.4 million and $34.7 million, respectively, as well as payment on our Credit Facility, net of amounts borrowed during the period, of $13.5 million.

Credit Facility

Interest only is payable monthly throughout the term of our Credit Facility. 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.

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 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 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 are 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 March 25, 2023.

Mortgages and specific lease financing arrangements with other parties (with certain limitations) are permitted under the Credit Facility. Other specific terms and the maintenance of specified ratios are generally consistent with our prior financing agreement. Additionally, the Credit Facility is not secured by our real property, although we have agreed not to encumber our real property, with certain permissible exceptions.

We were in compliance with all debt covenants at March 25, 2023.

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As of May 12, 2023, we had approximately $15.1 million in cash on hand. In addition, we had $494.9 million available under the Credit Facility as of May 12, 2023.

We believe that our sources of liquidity, namely cash flow from operations, availability under our Credit Facility, and cash and equivalents on hand, will continue to be adequate to meet our contractual obligations, working capital and capital expenditure needs, finance acquisitions, fund debt maturities, pay dividends and repurchase our common stock for at least the next 12 months and the foreseeable future.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and apply judgments that affect the reported amounts. In Note 1 to the Company’s consolidated financial statements, we describe the significant accounting policies used in preparing the consolidated financial statements. Our management believes that the accounting estimates listed below are those that are most critical to the portrayal of our financial condition and results of operations, and that require management’s most difficult, subjective, and complex judgments in estimating the effect of inherent uncertainties.

Business Combinations

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

Valuation of Long-Lived Assets

We assess potential impairments to our long-lived assets, which include property and equipment and ROU assets, whenever events or changes in circumstances indicate that the carrying value of an asset group may not be recoverable. Long-lived assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. The carrying value of an asset group is considered impaired when its carrying value exceeds its estimated undiscounted future cash flows. The amount of any impairment loss recorded is calculated as the excess of the asset group’s carrying value over its fair value. Fair value of the assets is determined based on the highest and best use of the asset group, considering external market participant assumptions. During the fourth quarter, we consider changes in the actual and forecasted financial performance of certain asset groups and we have determined such events indicated that a triggering event occurred for certain asset groups. We assessed the recoverability of certain asset groups through the use of an undiscounted cash flow model, which involved significant judgement in a number of assumptions including projected revenues and operating income. Such indicators may include, among others: a significant decline in our expected future cash flows; changes in expected useful life; unanticipated competition; slower growth rates, ongoing maintenance and improvements of the assets, or changes in operating performance. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements.

Insurance Reserves

We maintain a high retention deductible plan with respect to workers’ compensation and general liability insurance claims (except for in Ohio in which we are self-insured) and are otherwise self-insured for employee medical insurance claims. To reduce our risk and better manage our overall loss exposure, we purchase stop-loss insurance that covers individual claims more than the deductible amounts, and caps total losses in a fiscal year. We maintain an accrual for the estimated cost to settle open claims as well as an estimate of the cost of claims that have been incurred but not reported. These estimates take into consideration the historical average claim volume, the average cost for settled claims, current trends in claim costs, changes in our business and workforce, and general economic factors.

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These accruals are reviewed on a quarterly basis. For more complex reserve calculations, such as workers’ compensation, we periodically use the services of an actuary to assist in determining the required reserve for open claims.

Income Taxes

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

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

We measure and recognize the tax benefit from an uncertain tax position taken or expected to be taken on an income tax return based on the largest benefit that we determine is more likely than not of being realized upon settlement. We use significant judgment and estimates in evaluating our tax positions. Due to the complexity of some of these uncertain tax positions, the ultimate resolution may result in an actual tax liability that differs from our estimated tax liabilities for unrecognized tax benefits and our effective tax rate may be materially impacted. Income taxes are described further in Note 8 to the consolidated financial statements.

Accounting Standards

See “Recent Accounting Pronouncements” in Note 1 to the Company’s consolidated financial statements for a discussion of the impact of recently issued accounting standards on our consolidated financial statements as of March 25, 2023 and for the year then ended, as well as the expected impact on the consolidated financial statements for future periods.

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

Executive Overview

We continue to make strategic investments to support our operating and financial model designed to drive sustainable sales and profit growth. We have done this through our investment strategy focused on improving guest experience, enhancing customer-centric engagement, optimizing product and service offerings, and accelerating productivity and team engagement, as well as our growth strategy, including executing on accretive acquisition opportunities. During 2022, we:

Invested significantly in our team, including incremental investment in our technician labor.

Transformed 53 stores through rebranding and reimaging.

Acquired 47 stores through acquisition.

Recent Developments

In May 2022, we entered into an agreement with American Tire Distributors, Inc. to sell to our wholesale tire operations and internal tire distribution operations for approximately $105 million in the aggregate. Of the $105 million purchase price, $65 million is expected to be paid at the expected closing date during the first quarter of fiscal 2023 and the remaining $40 million is expected to be paid as earnout payments after the closing. The earnout payments will be earned, on a per-tire basis, based on tires we will buy from American Tire Distributors pursuant to a distribution agreement that we expect to enter with American Tire Distributors at the closing date of the sale of assets.

We expect to enter into additional agreements with American Tire Distributors at or prior to the closing date, including (1) a distribution agreement, in which American Tire Distributors will agree to supply and sell tires to our retail locations; (2) a managed services agreement, in which American Tire Distributors will provide category management, ordering, dashboard, and inventory management services to us; and (3) an agreement relating to preferred data services to be provided to us by American Tire Distributors.

Financial Summary

2022 included the following notable items:

Diluted earnings per common share (“EPS”) were $1.81.

Adjusted diluted EPS, a non-GAAP measure, were $1.85.

Sales increased 20.8 percent, driven by an increase in comparable store sales.

Comparable store sales increased 15.2 percent from the prior year, driven primarily by an increase in average ticket amount and guest traffic.

Operating income of $101.3 million was 40.2 percent higher than the prior year.

Net income was $61.6 million.

Adjusted net income, a non-GAAP measure, was $63.1 million.

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 generally accepted accounting principles in the 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 and items related to store impairment charges and closings, as well as Monro.Forward or acquisition initiatives. Reconciliations of these non-GAAP financial measures to GAAP measures are provided beginning on page 26 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

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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.

Impact of COVID-19

The full impact of the COVID-19 pandemic will depend on factors such as the length of time of the pandemic; how federal, state, and local governments are responding; the efficacy and distribution of the COVID-19 vaccines; the longer-term impact of the pandemic on the economy and consumer behavior; and the effect on our guests, teammates, vendors, and other partners.

During this time, we are focused on protecting the health and safety of our teammates and guests, while seeking to continue operating our business responsibly.

Although vaccine distribution has increased and more businesses are operating at levels similar to pre-pandemic capacity, we have experienced labor inefficiencies and a shortage of teammates in some of our store locations. If we are unable to fill enough teammate positions, we may be unable to earn as much revenue as if we were fully staffed. We have had to pay more for labor because our teammates continue working overtime to meet the surge in demand, which, along with an incremental investment we made in technician labor costs to support current and future sales growth amidst improving consumer demand trends, increased our technician labor costs as a percentage of sales and may decrease our gross profit and net income if not offset by other factors. Although we are experiencing unprecedented challenges during this pandemic, we continue our focus to remain as efficient as possible while still offering safe and high-quality service to our guests.

While we expect many teammates to return to our offices in the future, the timing of such a return could be affected by resurgences of COVID-19 in areas where our offices are located. When we return to our offices, we expect many teammates to continue to work in a hybrid of in-person and remote work. These changes to our operations going forward may present additional challenges and increased costs to ensure our offices are safe and functional for hybrid work that enable effective collaboration of both in-person and remote teammates.

Given the level of volatility and uncertainty surrounding the future impact of COVID-19, we cannot estimate with certainty the long-term impacts of the COVID-19 pandemic on our business, financial condition, results of operations, and cash flows. Please see the risks set forth in Part I, Item 1A. “Risk Factors” above for further discussion of the risks that may impact our longer-term operational and financial performance.

Analysis of Results of Operations

We have elected to omit discussion on the earliest of the three years covered by the consolidated financial statements presented. The discussion of our fiscal 2021 performance compared to our fiscal 2020 performance and our financial condition as of March 27, 2021 is incorporated herein by reference to Part II, Item 7., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located in our Form 10-K for the fiscal year ended March 27, 2021, filed on May 26, 2021.

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 8 to the Company’s consolidated financial statements for additional 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 361 selling days in both 2022 and 2021.

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 guests’ experience through a careful combination of merchandise assortment, price, convenience, and other factors will, over the long-term, drive both increasing guest traffic and the average ticket amount spent.

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The sales increase was primarily due to an increase in comparable store sales from an increase in average ticket amount and guest traffic as comparable store sales growth increased across our product categories with higher growth in our tires, maintenance, and brakes categories. Additionally, there was an increase in sales from new stores. Partially offsetting these increases was a decrease in sales from closed stores. The following table shows the drivers of the change in sales between 2022 and 2021.

(a)Sales from 2022 and 2021 acquisitions represented 6.0 percent of the changes between 2022 and 2021.

As the COVID-19 pandemic has evolved, demand for automotive undercar repair services as well as replacement tires and tire related services continues to be volatile. During 2022, comparable store sales growth increased across our product categories with higher growth in our higher-margin brakes, alignment, and maintenance categories, as well as our tire category, each of which had experienced declines during 2021.

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

(a)Includes 47 stores opened related to the 2022 acquisitions.

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Cost of Sales and Gross Profit

The increase in gross profit, as a percentage of sales, of 30 basis points (“bps”) for 2022, as compared to the prior year, was primarily due to a decrease in material costs, as a percentage of sales, because of a shift in sales mix from tires to our higher margin service categories. Additionally, through the use of our tire category and management pricing tool, we expanded our gross profit per tire from the prior year. We anticipate that expected inflationary impacts of higher material costs in the coming year will be offset by higher selling prices. The increase in gross profit, as a percentage of sales, was also partially due to 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. Partially offsetting these decreases was an increase in technician labor costs, which increased as a percentage of sales, as we made an incremental investment in technician labor to support current and future sales growth amidst improving consumer demand trends for our product and service categories and competitive pressure in the labor market for technicians. We expect to invest more in our teams in the coming year as we continue to build staffing to meet demand.

Operating, Selling, General and Administrative Expenses

The increase of $57.6 million in operating, selling, general and administrative (“OSG&A”) expenses from the prior year is primarily due to increased expenses from comparable stores, mainly store management compensation and operating expenses needed to match demand. However, we gained leverage with higher overall comparable store sales, which resulted in the decrease in OSG&A expenses, as a percentage of sales, from the prior year. The increase in OSG&A expenses for 2022 was also partially due to increased expenses from 48 new stores, as well as an increase in litigation settlement costs (mainly related to the Cerini matter described in Note 15 to the Company’s consolidated financial statements). Partially offsetting these increases were lower expenses for 2022 from seven stores closed compared to the prior year.

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Other Performance Factors

Net Interest Expense

Net interest expense of $24.6 million for 2022 decreased $3.6 million as compared to the prior year and decreased as a percentage of sales from 2.5 percent to 1.8 percent. Weighted average debt outstanding for 2022 decreased by approximately $100 million as compared to 2021. This decrease is primarily related to a decrease in debt outstanding under our Credit Facility. Partially offsetting this decrease was an increase in finance lease debt recorded in connection with the 2022 acquisitions. The weighted average interest rate increased approximately 10 basis points from the prior year.

Provision for Income Taxes

Our effective income tax rate was 20.3 percent for 2022 compared to 22.3 percent for 2021. The effective tax rate for 2022 and 2021 reflects an income tax benefit of $3.1 million and $0.5 million, respectively, due to the difference in statutory tax rates from a loss year to years in which such net operating loss may be carried back. See Note 9 to the Company’s consolidated financial statements for additional information.

Non-GAAP Financial Measures

In addition to reporting net income and diluted EPS, which are GAAP measures, this Form 10-K includes adjusted net income and adjusted diluted EPS, which are non-GAAP financial measures. We have included reconciliations to adjusted net income and adjusted diluted EPS from our most directly comparable GAAP measures, net income, and diluted EPS, below. Management views these non-GAAP financial measures as indicators to better assess comparability between periods because management believes these non-GAAP financial measures reflect our core business operations while excluding certain non-recurring items and items related to store impairment charges and 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:

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Adjusted diluted EPS is summarized as follows:

(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 income tax benefit related to net operating loss carryback adjustment to each of net income and diluted EPS is tax affected and reflects the difference in statutory tax rates from a loss year to years in which such net operating loss may be carried back, as finalized in 2022. The other adjustments to diluted EPS reflect adjusted effective tax rates of 24.1 percent and 23.5 percent for 2022 and 2021, respectively. These adjusted effective tax rates exclude the income tax impacts from share-based compensation and differences in statutory tax rates for net operating loss carrybacks. See 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 each of the last three fiscal years. The cash we generate from our operations will allow us to continue to support business operations, including planned investment in additional staffing, 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 enter into contractual obligations in the ordinary course of business that may require future cash payments. Such obligations include, but are not limited to, debt service, leasing arrangements, and other liabilities. The timing and nature of these obligations are expected to have an impact on our liquidity and capital requirements in future periods.

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Contractual Obligations

(a)Finance and operating lease commitments represent future undiscounted lease payments and include $103.5 million and $65.4 million, respectively, related to options to extend lease terms that are reasonably certain of being exercised.

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.

Summary of Cash Flows

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

Cash provided by operating activities

For 2022, cash provided by operating activities was $173.8 million, which consisted of net income of $61.6 million, adjusted by non-cash charges of $99.3 million and by a change in operating assets and liabilities of $12.8 million. The non-cash charges were largely driven by $81.2 million of depreciation and amortization. The change in operating assets and liabilities was largely due to our federal and state income taxes payable being a source of cash of $13.8 million due primarily to an income tax refund that was received.

For 2021, cash provided by operating activities was $184.9 million, which consisted of net income of $34.3 million, adjusted by non-cash charges of $90.2 million and by a change in operating assets and liabilities of $60.4 million. The non-cash charges were largely driven by $77.3 million of depreciation and amortization. The change in operating assets and liabilities was primarily due to accounts payable and accrued liabilities, net of vendor rebate receivables, being a source of cash of $37.2 million driven by timing of payments, as well as our inventory balance being a source of cash of $26.6 million due to decreased inventory purchases to adjust to lower demand.

Cash used for investing activities

For 2022, cash used for investing activities was $109.8 million. This was primarily due to cash used for acquisitions and capital expenditures, including property and equipment, of $83.3 million and $27.8 million, respectively. Included in the $83.3 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.

For 2021, cash used for investing activities was $66.3 million. This was primarily due to cash used for capital expenditures, including property and equipment, and acquisitions of $51.7 million and $17.2 million, respectively.

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Cash used for financing activities

For 2022, cash used for financing activities was $86.0 million which was primarily due to payment of finance lease principal and dividends of $39.4 million and $34.7 million, respectively, as well as payment on our Credit Facility, net of amounts borrowed during the period, of $13.5 million.

For 2021, cash used for financing activities was $434.2 million which was primarily due to payment of amounts previously borrowed on our Credit Facility and finance lease principal of $376.4 million and $33.4 million, respectively, as well as payment of dividends of $29.8 million.

Credit Facility

Interest only is payable monthly throughout the term of our Credit Facility. 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.

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 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 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, which among other things, amends certain of the financial terms in the Credit Agreement, as amended by the First Amendment. Specifically, the First Amendment had amended the interest rate charged on borrowings to be based on the greater of adjusted one-month LIBOR or 0.75 percent. The Second Amendment amends the interest rate to be based on the greater of adjusted one-month LIBOR or 0.00 percent. In addition, the Second Amendment updates certain provisions regarding a successor interest rate to LIBOR. Except as amended by the First Amendment and Second 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 March 26, 2022.

Mortgages and specific lease financing arrangements with other parties (with certain limitations) are permitted under the Credit Facility. Other specific terms and the maintenance of specified ratios are generally consistent with our prior financing agreement. Additionally, the Credit Facility is not secured by our real property, although we have agreed not to encumber our real property, with certain permissible exceptions.

We were in compliance with all debt covenants at March 26, 2022.

As of May 13, 2022, we had approximately $11.3 million in cash on hand. In addition, we had $430.4 million available under the Credit Facility as of May 13, 2022.

We believe that our sources of liquidity, namely cash flow from operations, availability under our Credit Facility, and cash and equivalents on hand, will continue to be adequate to meet our contractual obligations, working capital and capital expenditure needs, finance acquisitions, fund debt maturities, pay dividends and repurchase our common stock for at least the next 12 months and the foreseeable future.

Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and apply judgments that affect the reported amounts. In Note 1 to the Company’s consolidated financial statements, we describe the significant accounting policies used in preparing the consolidated financial statements. Our management believes that the accounting estimates

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listed below are those that are most critical to the portrayal of our financial condition and results of operations, and that require management’s most difficult, subjective, and complex judgments in estimating the effect of inherent uncertainties.

Business Combinations

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

Carrying Values of Long-Lived Assets

We assess potential impairments to our long-lived assets, which include property and equipment and ROU assets, whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. Long-lived assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. If it is determined that the carrying amounts of such long-lived assets are not recoverable, the assets are written down to their estimated fair values. Fair value of the assets is determined based on the highest and best use of the asset group, considering external market participant assumptions. Since the determination of future cash flows is an estimate of future performance, there may be future impairments if future cash flows do not meet expectations.

Insurance Reserves

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

Income Taxes

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

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

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We measure and recognize the tax benefit from an uncertain tax position taken or expected to be taken on an income tax return based on the largest benefit that we determine is more likely than not of being realized upon settlement. We use significant judgment and estimates in evaluating our tax positions. Due to the complexity of some of these uncertain tax positions, the ultimate resolution may result in an actual tax liability that differs from our estimated tax liabilities for unrecognized tax benefits and our effective tax rate may be materially impacted. Income taxes are described further in Note 9 to the consolidated financial statements.

Accounting Standards

See “Recent Accounting Pronouncements” in Note 1 to the Company’s consolidated financial statements for a discussion of the impact of recently issued accounting standards on our consolidated financial statements as of March 26, 2022 and for the year then ended, as well as the expected impact on the consolidated financial statements for future periods.