Tractor Supply Company — Form 10-Q Summary
Business Context and Reporting Period
Tractor Supply Company operates rural lifestyle retail stores and sells related products online. At June 27, 2015, it operated 1,438 stores in 49 states. This unaudited Form 10-Q covers the fiscal three and six months ended June 27, 2015, compared with June 28, 2014.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 | Change |
|---|
| Net sales | $1.773 billion | $1.584 billion | +11.9% |
| Gross profit | $625.3 million | $550.5 million | +13.6% |
| Gross margin | 35.3% | 34.8% | +50 bps |
| Operating income | $245.2 million | $211.0 million | +16.2% |
| Net income | $153.3 million | $133.4 million | +14.9% |
| Diluted EPS | $1.12 | $0.95 | +$0.17 |
| Metric | First Six Months 2015 | First Six Months 2014 | Change |
|---|
| Net sales | $3.104 billion | $2.768 billion | +12.2% |
| Gross profit | $1.070 billion | $946.8 million | +13.0% |
| Gross margin | 34.5% | 34.2% | +30 bps |
| Net income | $211.4 million | $182.2 million | +16.0% |
| Diluted EPS | $1.54 | $1.30 | +$0.24 |
- Comparable-store sales increased 5.6% in Q2 and 5.7% for the first six months. Q2 traffic increased 4.2% and average ticket increased 1.3%.
- First-half operating cash flow was $233.4 million, compared with $166.5 million in the prior-year period.
- Capital expenditures were $97.0 million, primarily for distribution-center capacity, new and relocated stores, and information technology.
- Cash and cash equivalents were $56.3 million at June 27, 2015. Working capital was $703.9 million.
- The company had no borrowings under its $400 million unsecured Senior Credit Facility, but had $57.4 million of outstanding letters of credit. It was in compliance with all debt covenants.
- Inventories were $1.293 billion, up from $1.155 billion at June 28, 2014, reflecting new-store growth, seasonal purchasing, early delivery for the fall season, and strategic category purchases.
- First-half financing cash use was $131.5 million, including $124.5 million of share repurchases and $49.1 million of dividends.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected both a 5.6% comparable-store increase and contributions from newer stores. Q2 sales from stores opened less than one year were $102.2 million.
- Gross margin benefited from price and markdown management, lower fuel costs, and favorable deflationary effects, partly offset by a higher mix of lower-margin big-ticket products.
- SG&A, including depreciation and amortization, was 21.4% of Q2 sales, essentially flat year over year; first-half SG&A improved to 23.6% from 23.7%.
- The effective tax rate increased to 37.2% from 36.7% in Q2 and from 36.9% for the first six months, principally because prior-year state tax incentives were unavailable.
- The company opened 58 stores and closed two during the first six months, compared with 55 openings and no closures in the prior-year period. The ending store count increased from 1,331 to 1,438.
- Share repurchases decreased to $124.5 million from $147.0 million in the first six months, while dividends increased to $49.1 million from $40.3 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected a full-year 2015 effective tax rate of approximately 37.0%.
- Management expected to open 110 to 115 new stores in fiscal 2015, compared with 107 in fiscal 2014. A new Casa Grande, Arizona distribution center was expected to open in late fiscal 2015.
- Management believed cash balances, operating cash flow, available credit, leases, and trade credit would fund operations and capital needs through the end of fiscal 2015.
- The business is seasonal, with historically higher sales and profits in the second and fourth quarters. Weather, consumer spending, product mix, deflation or inflation, competition, supply-chain execution, labor, technology, regulatory matters, and legal proceedings could materially affect results.
- The company was in settlement discussions with the DOJ and EPA concerning alleged Clean Air Act violations involving certain imported engines. Management did not expect a material adverse effect and did not believe losses above accrued amounts were reasonably possible.
- Construction commitments were approximately $13.3 million for the Casa Grande distribution center and $3.0 million for two Texas mixing centers.
- The company had $738.8 million remaining under its share-repurchase authorization through December 2017. A $0.20 quarterly dividend was declared on August 3, 2015, payable September 1, 2015.
- Management was assessing the impact and transition method for the deferred revenue-recognition standard, ASU 2014-09.
Investor Verification Points
- Verify whether comparable-store sales momentum and traffic growth continued after the reporting period, particularly given seasonal and weather sensitivity.
- Assess inventory growth, markdown risk, and working-capital requirements as the company expanded stores and prepared for fall demand.
- Monitor execution and spending for the Casa Grande distribution center, Texas mixing centers, and planned 2015 store openings.
- Review the sustainability of gross-margin gains from pricing, markdown management, fuel costs, and deflation.
- Confirm future share repurchases, dividend payments, and remaining liquidity under the credit facility.
- Track resolution and potential financial impact of the EPA/DOJ engine matter, including any civil penalty or injunctive relief.
