ITASCA, Ill. Midas has reported net earnings of $1.3 million, or 9 cents per diluted share, for the first quarter ended March 29. That’s compared to $2.2 million, or 14 cents per diluted share, in the first quarter of 2007. Both the 2008 and 2007 results include 2 cents per diluted share for special items.
Revenues for the quarter increased 8.5 percent to $44.8 million. Operating income declined $1.7 million to $4.1 million in 2008 from $5.8 million last year.
“The $1.7 million decline in operating income primarily resulted from the expected $1.1 million reduction in European royalties, increased spending to accelerate the transition of shops to new franchisees, a shortfall in U.S. franchising income and the timing of real estate sales gains,” said Alan Feldman, Midas’ chairman and chief executive officer. “These declines were partially offset by significant reductions in corporate expenses and strong retail performance in Canada.”
The company said that its increased emphasis on transitioning shops to new franchisees led to a 50 percent increase in shop transitions to 38 during the first quarter of 2008 from 25 a year ago.
“New franchisees continue to drive outstanding sales growth, with comparable shop retail sales at the 57 shops sold to new franchisees over the past year up 18.5 percent in the first quarter and up 14.7 percent over the past 12 months,” Feldman said. “We believe accelerating franchisee transitions where appropriate is a wise investment for the long-term health of the Midas system.”
To support this increase in transition activity, the company spent an incremental $400,000 for short-term lease costs to preserve shop sites, $300,000 to prepare shops for re-franchising and $100,000 to increase franchisee recruitment. The company also incurred $300,000 in operating losses and additional overhead to oversee the company-operated shops purchased from franchisees in the past six months. These increased costs related to transitions should result in improved profitability in the future as these shops are re-franchised.
“The challenging retail sales and economic environment in the U.S. had a negative effect on our results that was partially offset by strong performance in Canada, resulting in a $300,000 reduction in the year-over-year operating income in our North American franchise business,” Feldman said.
“Importantly, we were able to completely offset the entire $1.1 million decline in European royalties that resulted from the scheduled change in the license agreement from a fixed fee to a variable payment based on a percentage of sales,” said Feldman. “We accomplished this through our planned reductions in corporate expenses and improved profitability of our R.O. Writer software and wholesale businesses.”
In addition, gains from the sale of real estate were $200,000 lower in the first quarter this year than in 2007. The 2008 gains are not expected until later this year.
System-wide comparable shop retail sales in the United States were down 1.6 percent. The company said the decline in retail sales was caused by significant declines in the Southeast and the West, the same regions hit hardest by the current weak real estate and consumer credit markets. The remaining U.S. regions had positive comparable shop sales, including the Northeast and the North Central, which were both up more than 3 percent.
Retail sales at Midas shops in Canada, which has not experienced similar major housing and credit issues, were positive in all geographic regions. Overall comparable shop sales in Canada were up 7.8 percent.
“We continue to see strong sales increases in our new categories of tires and maintenance, which are helping to offset the decline in brakes” Feldman said. “Comparable shop tire sales increased by 18 percent in the U.S., while oil changes were up 10 percent and brake sales were down 9 percent. The launch of our new SecureStop brake service did not occur until late February and, therefore, had limited effect on our first quarter results. Preliminary results show positive U.S. comparable shop sales in April and improved fundamental brand measures in the first quarter.”
Net cash provided by operating activities was $6.9 million, or 50 cents per diluted share, in the first quarter, compared to $3.3 million, or 22 cents per diluted share, in the first quarter of last year. Lower cash outlays for business transformation costs, combined with positive cash flow from changes in assets and liabilities, more than offset the decline in net income.
Total sales and revenues for the first quarter were $44.8 million, compared to $41.3 million last year. Midas’ franchising revenues were $13.3 million for the quarter, down from $14.7 million in 2007. Approximately $1.1 million of this decline was due to the scheduled change in the Midas Europe license fees from a fixed amount to a variable payment based on a percentage of retail sales, while the balance was due to the elimination of royalties from company shops that were previously franchised.
Real estate revenues were $8.7 million compared to $9.0 million last year as a result of more company-operated shops.
Revenues from retail sales at company shops were $14.9 million during the quarter, up from $9.5 million in 2007. The increase is the result of operating an additional 34 company shops in the first quarter of 2008 compared to last year.
Replacement part sales and product royalties were $6.7 million, down from $7.0 million a year ago. The entire decline is due to the change in the U.S. warranty program whereby Midas no longer receives product royalties from its vendors. This warranty change resulted in a $0.9 million reduction in product royalties which was offset by a $0.6 million increase in the sale of tires, oil and batteries. This change in the warranty program also resulted in a $0.9 million reduction in warranty expense.
Revenues from the R.O. Writer software business were $1.2 million in the first quarter, compared to $1.1 million last year.
The company’s first quarter operating income was $4.1 million, compared to $5.8 million for the same period a year ago.
Interest expense for the quarter was $2.2 million, even with 2007. The company’s bank debt was $72.6 million at the end of the first quarter, down from $76.3 million at the end of 2007.
Midas recorded income tax expense of $0.8 million during the first quarter, compared to $1.5 million in the first quarter of 2007. The company does not pay a significant amount of cash income taxes because of net operating loss carry forwards of approximately $88 million from previous years.
Midas is increasing its previous 2008 full-year guidance to account for the acquisition of SpeeDee. Full year revenues are now expected to be approximately $193 million compared to the previous estimate of $190 million.
Operating income is expected to be approximately $1.5 million higher than the previous range of $27 to $29 million, excluding an estimated $1.5 million in business transformation costs related to the completion of the company’s shop re-imaging program.
Midas now expects cash flow from operating activities of between $32 and $34 million in 2008after providing for changes in working capital.
Midas intends to use this cash flow to pay down debt related to the SpeeDee acquisition, to repurchase shares and to fund opportunistic acquisitions and new shop growth.
The company expects full-year interest expense of $10 million, an increase of $0.5 million related to funding the SpeeDee acquisition. Midas expects capital spending of approximately $6 million.
“During the first quarter, we moved aggressively to implement three major initiatives, which will position Midas for ongoing growth. The launch of our SecureStop brake service will elevate and differentiate the Midas brand in this critical category,” Feldman said. “The acceleration of franchisee transitions will bring fresh energy and incremental sales results as we implement our total car care model. And, our acquisition of SpeeDee Oil Change will allow us to expand the Midas system as well as accelerate our push in the maintenance category.”