Tractor Supply Company 10-Q Summary
Business Context and Reporting Period
Tractor Supply Company reported results for the fiscal three and nine months ended September 28, 2013, compared with September 29, 2012. The company operates one reportable segment focused on retail sales of farm and ranch products. Store count increased to 1,245 from 1,151, reflecting 71 openings and two closures during the first nine months.
All share and per-share amounts were retrospectively adjusted for the two-for-one stock split completed September 26, 2013.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net sales | $1.208 billion | $1.066 billion | $3.750 billion | $3.378 billion |
| Net sales growth | 13.4% | — | 11.0% | — |
| Comparable-store sales growth | 7.5% | 2.9% | 5.3% | 5.5% |
| Gross profit | $415.7 million | $357.2 million | $1.274 billion | $1.141 billion |
| Gross margin | 34.4% | 33.5% | 34.0% | 33.8% |
| Operating income | $101.7 million | $77.8 million | $367.6 million | $312.0 million |
| Net income | $64.8 million | $50.0 million | $232.4 million | $197.0 million |
| Diluted EPS | $0.46 | $0.35 | $1.64 | $1.35 |
- Q3 operating margin was approximately 8.4%, compared with 7.3% in the prior-year quarter; nine-month operating margin was approximately 9.8%, compared with 9.2%.
- Q3 net margin was approximately 5.4%, compared with 4.7%; nine-month net margin was approximately 6.2%, compared with 5.8%.
- SG&A, including depreciation and amortization, improved to 26.0% of sales in Q3 from 26.2%, and to 24.2% for the first nine months from 24.6%.
- Cash and cash equivalents were $46.0 million at September 28, 2013, versus $138.6 million at year-end 2012 and $70.2 million at September 29, 2012.
- Inventories were $1.142 billion, up from $908.1 million at year-end 2012 and $1.020 billion at the prior-year quarter-end, reflecting new-store growth, seasonal purchases and distribution-center relocation needs.
- Working capital was $683.1 million, up $113.6 million from year-end 2012 and $63.2 million from the prior-year quarter-end.
Cash Flow, Debt and Liquidity
| Cash flow item | 9M 2013 | 9M 2012 |
|---|---|---|
| Cash provided by operating activities | $98.6 million | $155.8 million |
| Capital expenditures | $156.8 million | $111.2 million |
| Cash used in investing activities | $148.1 million | $97.4 million |
| Cash used in financing activities | $43.2 million | $165.2 million |
| Share repurchases | $90.6 million | $163.8 million |
| Dividends paid | $50.3 million | $37.2 million |
- Operating cash flow declined $57.2 million, primarily because of increased inventory investment and the timing of income-tax payments, partially offset by stronger earnings.
- The company borrowed $175.0 million and repaid $135.0 million under its revolving credit facility, ending with $40.0 million outstanding.
- The unsecured Senior Credit Facility provides up to $250 million, with a $150 million increase option, and matures in October 2016. The company had $47.3 million of letters of credit outstanding under the facility and was in compliance with all covenants.
- Management stated that existing cash, expected operating cash flow, available borrowings, leases and trade credit should fund operations and capital needs through the end of fiscal 2014.
Material Changes Versus the Prior Comparable Period
- Q3 sales increased 13.4%, with comparable-store sales up 7.5%; nine-month sales increased 11.0%, with comparable-store sales up 5.3%.
- Q3 net income increased 29.5%; nine-month net income increased 18.0%. Diluted EPS increased 31.4% in Q3 and 21.5% for the first nine months.
- Gross margin expanded 90 basis points in Q3 and 20 basis points for the first nine months, supported by markdown management, strategic sourcing, exclusive brands and price optimization.
- SG&A leverage improved despite new-store growth and one-time costs associated with relocating the Southeast distribution center and corporate data center.
- Capital expenditures increased $45.6 million to $156.8 million, driven by new stores, distribution-center capacity, the new store support center and information technology.
- Share repurchases declined to $90.6 million from $163.8 million during the first nine months. Remaining authorization was $200.6 million at September 28, 2013.
- The Board declared a quarterly dividend of $0.13 per share on October 30, 2013, payable December 3, 2013.
Guidance, Outlook, Risks and Unusual Items
- Management expected approximately 100 to 102 new stores during fiscal 2013, compared with 93 in fiscal 2012.
- The company expected a full-year effective income tax rate of approximately 36.6%.
- Q3 comparable-store sales benefited from an extended spring selling season and were favorably affected by approximately 100 basis points of inflation. The nine-month comparable-store sales increase was favorably affected by approximately 130 basis points of inflation, principally in pet food and livestock feed.
- One-time relocation costs reduced Q3 SG&A leverage by approximately 40 basis points.
- The company had approximately $33.3 million of construction commitments for its new store support center.
- Letters of credit totaled $65.6 million, including $47.3 million under the Senior Credit Facility and $18.3 million outside that facility.
- The company remained involved in EPA and Department of Justice discussions concerning alleged Clean Air Act violations involving certain engines. Management expected no material adverse effect and intended to seek vendor reimbursement for penalties paid under any settlement.
- Key risks include consumer spending, weather and seasonality, commodity and transportation-cost volatility, competition, new-store execution, foreign suppliers, employee retention, technology and supply-chain disruptions, regulatory matters, tax-rate changes and litigation.
- The business is seasonal, with historically higher sales and profits in the second and fourth quarters and elevated inventory and accounts payable balances in the first and third quarters.
Important Facts for Investors to Verify
- Whether inventory growth and early seasonal purchases convert into expected fourth-quarter sales without elevated markdowns or working-capital pressure.
- The sustainability of gross-margin expansion after considering inflation, product mix and freight-intensive C.U.E. merchandise.
- Progress, costs and execution of the Macon, Georgia distribution-center relocation and the new Brentwood, Tennessee store support center.
- Future borrowing needs, covenant headroom and liquidity after capital expenditures, dividends and share repurchases.
- The timing and potential cost of the EPA/DOJ Clean Air Act matter and the likelihood of vendor reimbursement.
- Whether the stated fiscal 2013 store-opening plan and fiscal 2014 liquidity outlook are achieved.