Tractor Supply Company 2019 Q2 Form 10-Q Summary
Business Context and Reporting Period
Tractor Supply Company is a rural lifestyle retailer serving recreational farmers, ranchers, tradesmen, small businesses, and pet owners through Tractor Supply, Del’s, and Petsense. At June 29, 2019, the company operated 1,967 stores in 49 states, including 1,790 Tractor Supply and Del’s locations and 177 Petsense locations, with online sales through TractorSupply.com and Petsense.com. The filing covers the fiscal quarter and six months ended June 29, 2019, compared with June 30, 2018. The interim financial statements are unaudited.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | Change |
|---|---|---|---|
| Net sales | $2.354 billion | $2.213 billion | 6.3% |
| Gross profit | $820.7 million | $769.4 million | 6.7% |
| Gross margin | 34.87% | 34.76% | +11 bps |
| Operating income | $287.6 million | $273.5 million | 5.2% |
| Net income | $219.2 million | $207.3 million | 5.8% |
| Diluted EPS | $1.80 | $1.69 | 6.5% |
| Dividends declared per share | $0.35 | $0.31 | 12.9% |
| Metric | Six Months 2019 | Six Months 2018 | Change |
|---|---|---|---|
| Net sales | $4.176 billion | $3.896 billion | 7.2% |
| Gross profit | $1.436 billion | $1.333 billion | 7.7% |
| Gross margin | 34.38% | 34.21% | +17 bps |
| Operating income | $391.0 million | $368.2 million | 6.2% |
| Net income | $296.0 million | $278.7 million | 6.2% |
| Diluted EPS | $2.43 | $2.25 | 8.0% |
Q2 operating margin was approximately 12.2%, compared with approximately 12.4% in the prior-year quarter. Six-month operating margin was approximately 9.4%, compared with approximately 9.5% previously. SG&A, including depreciation and amortization, increased 7.5% in Q2 and 8.3% for the six-month period, outpacing sales growth. Management attributed the increase primarily to costs related to the new Frankfort, New York distribution facility and investment in store wages.
Comparable store sales increased 3.2% in Q2 and 4.0% for the first six months. Q2 comparable average transaction value increased 2.2% and transaction count increased 1.0%. Growth was led by everyday merchandise and spring and summer seasonal categories.
Cash Flow, Debt, Liquidity, and Capital Allocation
- Six-month operating cash flow was $348.9 million, up from $274.0 million in the prior-year period.
- Capital expenditures were $83.5 million, down from $116.7 million, primarily due to lower distribution-center spending.
- Financing activities used $248.2 million, including $334.2 million for share repurchases and $79.7 million for dividends, partially offset by $81.3 million of net debt borrowings and $89.4 million of stock-issuance proceeds.
- Cash and cash equivalents were $104.0 million at June 29, 2019, compared with $86.3 million at December 29, 2018 and $70.0 million at June 30, 2018.
- Outstanding borrowings totaled $490.0 million before debt issuance costs, including $150.0 million of senior notes, $240.0 million of term loans, and $100.0 million of revolving credit loans. Total debt net of issuance costs was $488.8 million.
- Working capital was $666.4 million, down from $856.3 million at year-end 2018, principally reflecting the recognition of operating lease liabilities, higher inventory, and timing-related changes in taxes and accrued expenses.
- The company had $37.3 million of outstanding letters of credit and was in compliance with all debt covenants.
- The share repurchase authorization was increased by $1.5 billion to $4.5 billion; $1.69 billion remained available at June 29, 2019.
Material Changes Versus the Prior Comparable Period
- Sales, gross profit, operating income, net income, and diluted EPS all increased year over year, while gross margin improved modestly.
- Store count increased to 1,967 from 1,899, including 25 new Tractor Supply stores and two new Petsense stores during the first six months, compared with 40 and seven, respectively, in the prior-year period.
- Inventory increased to $1.733 billion from $1.632 billion, driven by new-store growth, seasonal needs, and inventory supporting the Frankfort distribution center.
- The adoption of ASC 842 in the first quarter resulted in approximately $2.08 billion of additional operating lease right-of-use assets and lease liabilities. Prior balance-sheet periods were not recast and are not directly comparable. The adoption did not materially affect income, comprehensive income, equity, or cash flow.
- Total debt increased from $407.4 million net of issuance costs at December 29, 2018, but remained below the $541.4 million reported at June 30, 2018.
- Repurchases increased to $334.2 million from $252.5 million, while dividends paid increased to $79.7 million from $71.4 million.
Guidance, Outlook, Risks, and Unusual Items
- Management expected a fiscal 2019 effective tax rate of 22.4% to 22.7%.
- The company expected to open approximately 80 new Tractor Supply stores and 10 to 15 new Petsense stores in fiscal 2019.
- Management stated that cash balances, operating cash flow, debt capacity, leases, and trade credit were expected to fund operations and capital expenditures through the end of fiscal 2019.
- The business is seasonal, with sales and profits historically strongest in the second and fourth quarters. Weather can shift sales and profits between quarters, so management recommends evaluating performance over six-month periods.
- Key risks include consumer spending, weather, competition from online retailers, product-cost and tariff volatility, foreign-supplier reliance, labor availability, technology and data-security failures, supply-chain disruption, regulatory changes, tax-rate changes, litigation, and execution of store, distribution, and technology investments.
- Operating lease liabilities totaled $2.193 billion at present value, with approximately $192.4 million of legally binding minimum payments for leases signed but not yet commenced.
- Ordinary-course litigation was not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- On August 7, 2019, the board declared a $0.35 quarterly dividend payable September 10, 2019.
Important Facts for Investors to Verify
- Confirm the sustainability of comparable-store sales growth, particularly the 3.2% Q2 increase, amid seasonal and weather variability.
- Monitor whether SG&A growth and Frankfort distribution-center costs moderate sufficiently to support operating-margin expansion.
- Assess inventory growth, seasonal inventory requirements, tariffs, and transportation costs for potential effects on gross margin and cash conversion.
- Reconcile debt balances, revolving-credit usage, interest-rate exposure, swap positions, and compliance with the 2.00-to-1.00 fixed-charge coverage and 4.00-to-1.00 leverage covenants.
- Consider the effect of substantial operating lease obligations when evaluating leverage and liquidity; pre-ASC 842 balance sheets are not directly comparable.
- Verify the pace and returns of planned store openings, Petsense expansion, distribution investments, share repurchases, and dividends against available cash flow and debt capacity.