Tractor Supply Company 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the fiscal quarter and nine months ended September 28, 2019, compared with September 29, 2018. Tractor Supply is a U.S. rural-lifestyle retailer operating Tractor Supply, Del’s and Petsense stores, together with e-commerce sites. The company operated 1,990 stores in 49 states at quarter-end, including 1,814 Tractor Supply and Del’s stores and 176 Petsense stores.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $1.984 billion | $1.882 billion | $6.160 billion | $5.778 billion |
| Gross profit | $694.2 million | $653.1 million | $2.130 billion | $1.986 billion |
| Gross margin | 34.99% | 34.71% | 34.58% | 34.38% |
| Operating income | $161.8 million | $153.1 million | $552.8 million | $521.4 million |
| Net income | $122.1 million | $116.8 million | $418.2 million | $395.5 million |
| Diluted EPS | $1.02 | $0.95 | $3.45 | $3.20 |
| Net margin | 6.2% | 6.2% | 6.8% | 6.8% |
Third-quarter net sales increased 5.4%, comparable-store sales increased 2.9%, and transaction value and transaction count increased 2.3% and 0.6%, respectively. Nine-month net sales increased 6.6%, while comparable-store sales increased 3.6%.
Gross-margin expansion reflected the price-management program and lower transportation costs in the quarter, as well as price management and strong seasonal sell-through for the nine-month period. SG&A, including depreciation and amortization, increased 6.5% in Q3 and 7.7% for the nine-month period. SG&A as a percentage of sales increased to 26.83% from 26.57% in Q3 and to 25.60% from 25.35% for nine months.
Net cash provided by operating activities was $414.3 million for the first nine months, up from $353.4 million. Capital expenditures were $144.3 million, down from $193.7 million, resulting in approximately $270.0 million of operating cash flow less capital expenditures before financing activities. Cash used in financing activities was $276.0 million, including $490.0 million of share repurchases and $121.2 million of dividends.
At September 28, 2019, cash and cash equivalents were $82.6 million, inventories were $1.813 billion, and working capital was $753.8 million. Total outstanding borrowings were $645.0 million, or $643.9 million net of debt issuance costs, compared with $408.8 million at December 29, 2018. The company had $34.0 million of outstanding letters of credit and remained in compliance with its debt covenants.
Material Changes Versus Prior Comparable Period
- Sales and net income grew, but earnings growth was moderated by higher SG&A and a higher effective tax rate in Q3.
- Gross margin improved 28 basis points in Q3 and 20 basis points for the first nine months.
- Q3 SG&A included approximately $2.9 million related to an executive transition agreement. Management reported adjusted Q3 net income of $124.4 million, or $1.04 diluted EPS, excluding the approximately $2.3 million after-tax impact.
- Share repurchases increased to $490.0 million for the first nine months from $289.2 million, and the company repurchased 4.926 million shares versus 4.296 million shares.
- The company adopted ASC 842 lease accounting in the first quarter. This added approximately $2.08 billion of right-of-use assets and lease liabilities and materially increased reported assets and liabilities; comparative balance sheets were not recast.
- Operating stores increased to 1,990 from 1,929 at the prior-year comparable date. The company opened 50 Tractor Supply stores and three Petsense stores during the first nine months.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management expected the fiscal 2019 effective tax rate to be between 22.4% and 22.6%. The company expected to open approximately 80 new Tractor Supply stores and approximately 10 new Petsense stores during fiscal 2019. Management stated that available cash, operating cash flow, debt capacity, leases and trade credit should fund operations and capital needs through the end of fiscal 2019.
The board increased total share-repurchase authorization to $4.5 billion; $1.53 billion remained available at September 28, 2019. The board subsequently declared a $0.35-per-share dividend on November 6, 2019, payable December 10, 2019.
Key risks include consumer spending and economic conditions, seasonality and weather, competition including online retailers, commodity and transportation cost volatility, tariffs and foreign-supplier exposure, labor availability, technology and cybersecurity, supply-chain execution, regulatory and tax changes, litigation, and the ability to manage store growth and expenses. The company identified no material changes to the risk factors in its prior Form 10-K.
Ordinary-course litigation was not expected to have a material adverse effect. Interest-rate swaps were used to reduce exposure to variable-rate debt; management estimated that a 1% rate change on uncovered variable-rate debt would affect quarterly interest expense by approximately $0.4 million.
Important Facts for Investors to Verify
- Assess whether comparable-store sales and transaction trends can offset the slower contribution from new stores.
- Verify the sustainability of gross-margin gains and monitor SG&A pressure from the Frankfort distribution facility, wages and executive transition costs.
- Reconcile reported leverage and liquidity after considering $645.0 million of borrowings, operating lease liabilities of approximately $2.236 billion, inventories of $1.813 billion and only $82.6 million of cash.
- Review the pace and funding of share repurchases, dividends and planned store openings relative to operating cash flow.
- Consider the balance-sheet comparability effects of ASC 842 and the company’s substantial future lease commitments.
- Confirm fiscal 2019 tax-rate guidance, store-opening results and any subsequent changes in debt, covenants, tariffs, weather impacts or legal contingencies.