Business Context and Reporting Period
Tractor Supply Company filed its Form 10-K for the 52-week fiscal year ended December 28, 2013. The filing also provides unaudited fourth-quarter results. The company operates one reportable segment: retail farm and ranch products, sold through Tractor Supply Company and Del’s Feed & Farm Supply stores and TractorSupply.com.
At year-end, the company operated 1,276 stores in 48 states, following 102 openings and two closures during fiscal 2013. Livestock and pet products represented 43% of sales, hardware/tools/truck/towing 23%, seasonal/gift/toy products 20%, clothing and footwear 9%, and agriculture 5%.
Financial Results and Key Metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Net sales | $5.165 billion | $4.664 billion | +10.7% |
| Gross profit | $1.754 billion | $1.566 billion | +12.0% |
| Gross margin | 34.0% | 33.6% | +40 bps |
| Operating income | $514.7 million | $436.8 million | +17.8% |
| Operating margin | 10.0% | 9.4% | +60 bps |
| Net income | $328.2 million | $276.5 million | +18.7% |
| Diluted EPS | $2.32 | $1.90 | +22.1% |
| Cash flow from operations | $333.7 million | $378.3 million | -11.8% |
| Capital expenditures | $218.2 million | $152.9 million | +42.7% |
Fiscal 2013 comparable-store sales increased 4.8%, driven primarily by consumable, usable and edible products, especially animal and pet merchandise, as well as winter seasonal products. Comparable transactions increased 4.7%, while average ticket was approximately flat. Management estimated that inflation, principally in pet food and livestock feed, contributed approximately 70 basis points to comparable-store sales.
Fiscal fourth-quarter sales were $1.415 billion, gross profit was $479.7 million, operating income was $147.1 million, and net income was $95.9 million. Fourth-quarter diluted EPS was $0.68 and comparable-store sales increased 3.5%.
At December 28, 2013, cash and cash equivalents were $142.7 million, inventory was $979.3 million, working capital was $677.1 million, total assets were $1.903 billion, and stockholders’ equity was $1.247 billion. Long-term debt excluding the current portion was $1.2 million, consisting of capital lease obligations.
The company had no borrowings under its $250 million unsecured Senior Credit Facility, which included a $150 million increase option, although $38.2 million of letters of credit were outstanding. The facility matures in October 2016, and the company was in compliance with its covenants.
Cash used in investing activities was $209.3 million, primarily reflecting capital expenditures. Cash used in financing activities was $120.3 million, including $129.4 million of share repurchases and $68.5 million of dividends, partly offset by equity issuance and related tax benefits. The company ended the year with approximately $143 million of cash after returning nearly $198 million to stockholders.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected 4.8% comparable-store growth and continued expansion; new-store sales contributed approximately 6.0 percentage points of the 10.7% sales increase.
- Gross margin improved 40 basis points due to better direct product margin from inventory and markdown management, strategic sourcing, exclusive branding, and retail price management.
- SG&A, including depreciation and amortization, improved to 24.0% of sales from 24.2%, despite costs associated with the new Southeast distribution center and corporate data-center relocation.
- Inventory increased $71.2 million, primarily because of store growth, while average inventory per store declined 0.5%. Operating cash flow decreased because inventory increased, accounts payable declined, and estimated tax-payment timing changed.
- Capital expenditures increased to $218.2 million, including spending on 102 new stores, distribution-center capacity, a new Brentwood store support center, technology, and existing stores.
- Share repurchases declined to approximately 2.3 million shares costing $129.4 million, compared with approximately 6.1 million shares costing $271.8 million in fiscal 2012. Remaining repurchase authorization was $161.8 million at year-end.
- The company completed a two-for-one stock split in September 2013; all share and per-share amounts in the filing are retrospectively adjusted.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management expected to open 102 to 106 stores in fiscal 2014, increasing selling square footage by approximately 8%, and estimated fiscal 2014 capital expenditures of $240 million to $250 million. Planned investments included a new Southwest distribution center, continued warehouse-management-system deployment, completion of the Brentwood store support center by the end of the third quarter, and information-technology and multichannel upgrades.
Management stated that existing cash, expected operating cash flow, available credit, leases, and normal trade credit should fund operations and fiscal 2014 capital needs. The company’s long-term strategy emphasizes store expansion, comparable-store sales, exclusive brands, margin initiatives, operating efficiencies, e-commerce, and selective acquisitions.
- The business is seasonal and sensitive to weather, with the highest sales and profits generally in the second and fourth quarters.
- Key risks include consumer spending, competition, comparable-store sales execution, purchase-price and commodity volatility, foreign sourcing, vendor disruption, labor costs, distribution interruptions, technology implementation, cybersecurity, information-system reliability, and regulatory compliance.
- The company had approximately $1.855 billion of future operating-lease payments, including $220.4 million due in 2014, plus $27.9 million of construction commitments.
- The company was negotiating with the DOJ and EPA regarding alleged Clean Air Act violations involving certain imported engines. The company expected a civil penalty and injunctive relief but did not expect a material adverse effect; the filing does not state the settlement amount.
- No significant impairment charges were recognized in fiscal 2013, and no goodwill impairment was identified.
- Management and Ernst & Young concluded that internal control over financial reporting and disclosure controls were effective. Ernst & Young issued unqualified audit opinions.
Investor Verification Priorities
- Verify the sustainability of comparable-store sales growth, particularly after the estimated inflation benefit in pet food and livestock feed.
- Track whether planned store openings, distribution investments, and technology initiatives deliver expected sales, margin, and cash-flow returns.
- Reconcile operating cash flow with net income and monitor inventory growth, accounts payable timing, and seasonal working-capital requirements.
- Review the effect of the $240 million to $250 million fiscal 2014 capital-spending plan on free cash flow and future repurchases or dividends.
- Assess lease commitments, letters of credit, self-insurance reserves, sales-tax exposures, and the unresolved EPA/DOJ matter.
- Confirm the remaining share-repurchase authorization, dividend policy, and the company’s continued covenant compliance and access to its credit facility.