Stock Summary: Monro and Tandy Leather
This week I review Monro and value Tandy Leather based on their latest balance sheet
Monro
Last year I wrote up Monro in the Idea List: Issue #2. Back then the stock caught my eye because it was trading at a low FCF multiple. In the previous write up MNRO was trading for $30, and my rough fair value estimate was $27. Now the stock is at $12.80 so I thought it would be worthwhile to revisit the company.
During 2024, Monro was facing the impact of inflation and were having trouble with a weak consumer environment. Customers were, and still are, delaying purchases and trading down to cheaper tires. Basically the negative story from last year is still playing out, but now the shares have sold off heavily in the mean time. A year ago Monro’s FCF multiple was about 6x, and now the figure is at 5.67x. The reason the mutliples are about the same is because free cash flow has declined while the share price has also slid. Additionally Monro was previously trading at 1.25x book value, but now trades at a discount to book value at 0.59.
Currently Monro has an 8.75% dividend yield. This sounds nice to me, but the high yield could be a trap. Dividend coverage based on TTM net income looks bad with the payout ratio coming out to 175%. Looking to the cash flow statement paints a slightly better picture. Cash from operations was $98M, capital expenditures was $27M, and the dividend cost $36M, leaving $35M to go to the balance sheet (I simplified things a bit ignoring some one time line items). Based in this Monro could probably sustain the dividend as long as the business doesn’t continue to deteriorate, but I would not be surprised if the dividend got cut.
Monro has little debt, a high dividend yield, and is now cheap on a free cash flow and book value basis. The company seems to just be facing temporary headwinds with penny pinching consumers impacting their margins. MNRO seems a lot more interesting to me at these price levels than last year where it was trading near my fair value estimate. So in my view, Monro will be added to the list of stocks to do more further due diligence on.
Tandy Leather Factory
Tandy Leather became my largest holding leading up to its special dividend earlier in the year. In my view, Tandy was trading below its net current asset value before they announced the sale of their HQ for $26.5M. After net-sale proceeds of the HQ that was undervalued on the books, and the $12M special dividend, I estimated that Tandy’s balance sheet would end up about the same before the sale. However I had to wait a couple of months until Tandy’s earnings release a couple of weeks ago to get an updated view of their balance sheet.
Some of the key points of Tandy’s latest earnings release included Q1 sales that were $19M, which was down $0.3M from last year. Gross profit for the first quarter was $10.7M compared to $10.9M. Tandy’s net income without considering the sale of the HQ was $0.4M. The company had $23.6M in cash, compared to $12.3M YoY. This cash figure reflects sale of HQ and payment of $12.7M special dividend. Management said internal sales target are slightly better than expected, but cautioned the impact of tariffs.
In my last write up on TLF, I tried to estimate what their balance sheet might look like after the HQ sale and special dividend. The figure I came up with was $53.5M in current assets after the special dividend. As you’ll see in a second, I wasn’t too far off. Turning to Tandy’s up to date balance latest sheet: cash and equivalents $23.6M, inventory $34.4M, total current assets $59.4M. As for liabilities, current liabilities come in at $13.2M, the primary long term liability is the operating lease which is $7.5M. When considering net-nets, I add back lease liabilities. This gets a net current asset value of $46.2M, and with 8.595M shares outstanding, NCAV per share is $5.38. Currently TLF is trading around $2.90, so it is a large discount to its net-net value. I tried to be reasonably conservative with my balance sheet estimate for the latest financials came out, so it was nice to see that Tandy’s current assets are better than I expected.
Stocks mentioned: MNRO 0.00%↑ TLF 0.00%↑
I have been scratching my head with Monro too.
It could be argued that the company is already trading close to or below the replacement cost of such a network of shops. Not much value is placed to the business.
The departure of the CEO is a little bit worrisome. Perhaps something is not ok from the perspective of competition and/or internal performance.
On TLF, I would discount the inventory, which is especially relevant for retailers.
I haven’t looked at Munro, but just took a quick glance and I would be concerned about them being able to sustain the dividend. The current ratio is .53 and the quick ratio .18.
It looks like they have been paying down debt by closing stores.
I would be more excited if insiders were buying as well.