Business Context and Reporting Period
Tractor Supply Company, the largest U.S. rural lifestyle retailer, filed an unaudited Form 10-Q for the fiscal three months ended March 30, 2019, compared with March 31, 2018. The Company operated 1,951 stores in 49 states, including 1,775 Tractor Supply and Del’s stores and 176 Petsense stores, plus online channels.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $1.822 billion | $1.683 billion | +8.3% |
| Gross profit | $615.0 million | $563.6 million | +9.1% |
| Gross margin | 33.75% | 33.49% | +26 bps |
| Operating income | $103.4 million | $94.7 million | +9.1% |
| Net income | $76.8 million | $71.4 million | +7.6% |
| Diluted EPS | $0.63 | $0.57 | +10.5% |
| Net cash used in operating activities | $13.0 million | $21.9 million | Use decreased $8.9 million |
| Capital expenditures | $28.8 million | $45.1 million | Down $16.4 million |
- Comparable store sales increased 5.0%, driven by a 3.2% increase in average ticket and a 1.8% increase in transaction count. All geographic regions and major product categories reported positive comparable growth.
- Gross-margin expansion reflected strong winter-seasonal sell-through and price-management initiatives, partly offset by higher transportation costs.
- SG&A, including depreciation and amortization, increased 9.1% to $511.6 million; SG&A as a percentage of sales rose to 28.07% from 27.86%, primarily due to the Frankfort, New York distribution facility, higher incentive compensation, and wage investments.
- Cash and cash equivalents were $102.2 million at March 30, 2019, compared with $132.4 million at March 31, 2018. Working capital was $767.1 million.
- Total debt was $627.0 million net of issuance costs, including $232.0 million of revolving borrowings. Total outstanding borrowings were $628.3 million, compared with $706.3 million a year earlier. The Company was in compliance with all debt covenants.
- The Company had $35.4 million of outstanding letters of credit and interest-rate swaps with a total fair-value asset of $3.9 million.
- Financing activities provided $57.4 million, including $219.5 million of net debt borrowings, $155.3 million of share repurchases, and $37.6 million of dividends paid. Ending cash increased $15.9 million from year-end to $102.2 million.
Material Changes Versus the Prior Comparable Period
- Sales, gross profit, operating income, net income, and diluted EPS all increased year over year, while comparable store sales growth accelerated from 3.7% in Q1 2018 to 5.0% in Q1 2019.
- The store base increased from 1,872 to 1,951 locations year over year. During the quarter, the Company opened 10 Tractor Supply stores and one Petsense store, versus 15 and four, respectively, in Q1 2018.
- Inventory increased to $1.881 billion from $1.760 billion, primarily to support new-store growth, seasonal merchandise, and the Frankfort distribution center. Accounts payable increased to $785.1 million from $732.5 million.
- The Company adopted ASC 842 lease accounting, recognizing approximately $2.08 billion of operating lease right-of-use assets and related liabilities. Comparative balance sheets were not recast, making certain balance-sheet comparisons less meaningful.
- Total debt declined from $704.6 million to $627.0 million net of issuance costs, although revolving credit borrowings increased from zero at March 31, 2018 to $232.0 million at March 30, 2019.
- The effective tax rate increased to 22.0% from 20.9%, primarily because prior-year federal and state credits did not recur.
- Share repurchases declined slightly in dollar terms to $155.3 million from $157.5 million, while the number of shares repurchased fell to 1.724 million from 2.367 million because of a higher average repurchase price.
Guidance, Outlook, Risks, and Unusual Items
- Management expects a fiscal 2019 effective tax rate between 22.4% and 22.7%.
- The Company expects to open approximately 80 new Tractor Supply stores and 10 to 15 new Petsense stores during fiscal 2019.
- Management believes cash balances, operating cash flow, available debt capacity, leases, and trade credit will fund operations and planned capital expenditures through the end of fiscal 2019.
- The Board increased the total share-repurchase authorization to $4.5 billion on May 8, 2019. Remaining authorization at March 30, 2019 was $364.7 million. The Board also declared a quarterly dividend of $0.35 per share payable June 11, 2019.
- The business is seasonal, with generally higher sales and profits in the second and fourth quarters. Weather can materially shift sales and profits between quarters, particularly between the first and second quarters.
- Key risks include consumer spending, weather, competition from online retailers, purchase-price and transportation-cost volatility, tariffs, foreign-supplier dependence, store expansion and distribution execution, labor availability, technology and cybersecurity, regulatory changes, litigation, tax-rate changes, and interest-rate exposure.
- Ordinary-course litigation was not expected to have a material adverse effect. No material real-estate or construction commitments extending beyond 12 months were reported.
- Adoption of ASU 2017-12 resulted in a $0.7 million reclassification from retained earnings to accumulated other comprehensive income and did not materially affect the financial statements.
Important Facts for Investors to Verify
- Assess whether comparable-store sales momentum and gross-margin gains continue beyond the seasonally weaker first quarter.
- Monitor inventory growth, sell-through, transportation costs, and the operating performance of the Frankfort distribution center.
- Reconcile reported leverage and liquidity after including the substantial operating lease obligations recognized under ASC 842.
- Track revolving-credit usage, interest rates, covenant compliance, and cash generation during the seasonal inventory build.
- Evaluate the sustainability of the expanded share-repurchase program and rising dividend against operating cash flow and debt requirements.
- Confirm whether the expected store openings, tax-rate range, and fiscal 2019 liquidity outlook are achieved.