Tractor Supply Company — Fiscal 2012 Second-Quarter Form 10-Q
Business context and reporting period
Tractor Supply Company operates one reportable segment: retail sales of farm and ranch products. This filing covers the fiscal quarter and six months ended June 30, 2012, compared with periods ended June 25, 2011. The business is highly seasonal, with typically stronger sales and profits in the second and fourth quarters. The company operated 1,135 stores at quarter-end, up from 1,043 a year earlier.
Key financial metrics
| Metric | Three months ended June 30, 2012 | Prior comparable period | Change |
|---|---|---|---|
| Net sales | $1.292 billion | $1.178 billion | +9.6% |
| Gross margin dollars | $451.5 million | $402.5 million | +12.2% |
| Gross margin | 34.9% | 34.1% | +80 bps |
| Operating income | $169.8 million | $144.3 million | +17.7% |
| Operating margin | 13.1% | 12.2% | +90 bps |
| Net income | $106.6 million | $91.2 million | +17.0% |
| Diluted EPS | $1.45 | $1.23 | +17.9% |
| Metric | Six months ended June 30, 2012 | Prior comparable period | Change |
|---|---|---|---|
| Net sales | $2.312 billion | $2.015 billion | +14.8% |
| Gross margin dollars | $784.3 million | $676.1 million | +16.0% |
| Gross margin | 33.9% | 33.6% | +30 bps |
| Operating income | $234.2 million | $173.0 million | +35.4% |
| Operating margin | 10.1% | 8.6% | +150 bps |
| Net income | $146.9 million | $109.5 million | +34.2% |
| Diluted EPS | $2.00 | $1.47 | +36.1% |
Second-quarter same-store sales increased 3.2%; approximately 275 basis points came from inflation, principally in consumable, usable and edible products. First-half same-store sales increased 6.7%, including approximately 340 basis points from inflation. New-store sales and an approximately 8.8% increase in store count also contributed to growth.
At June 30, 2012, cash and cash equivalents were $179.1 million, restricted cash was $8.8 million, inventory was $946.9 million, working capital was $663.5 million, and total assets were $1.722 billion. Total liabilities were $655.3 million. The company had no borrowings under its $250 million unsecured Senior Credit Facility, although $60.1 million of letters of credit were outstanding. It was in compliance with all debt covenants.
Operating cash flow for the first six months was $152.2 million, compared with $117.4 million in the prior period. Capital expenditures were $65.6 million. Financing cash outflows included $102.5 million of share repurchases and $23.0 million of dividends. Cash increased by $2.1 million during the period to $179.1 million.
Material changes versus the prior comparable period
- Gross-margin expansion reflected a more favorable sales mix, improved direct product margin, inventory management, strategic sourcing, private branding and pricing initiatives.
- SG&A, including depreciation and amortization, improved to 21.8% of sales in the second quarter from 21.9% and to 23.8% for the first six months from 25.0%. Total SG&A increased because of new-store growth, variable selling costs and operation of the Franklin, Kentucky distribution center.
- The company opened 18 stores in the second quarter and 51 in the first six months, compared with 16 and 42, respectively, in the prior-year periods; one store was closed in the first six months.
- Inventory increased $116.1 million from December 31, 2011, primarily to support new stores and seasonal demand, with inflation also increasing average inventory per store.
- Share repurchases declined to 1.16 million shares costing $102.5 million in the first six months, from 2.16 million shares costing $122.9 million in the prior period. Remaining authorization was $460.4 million through April 2015.
- The effective tax rate increased to 37.2% for the quarter and 37.1% for the first six months, from 36.7% and 36.6%, respectively, due mainly to lower federal tax credits and reduced permanent tax benefits.
Guidance, outlook, risks and unusual items
- Management expected a full-year effective tax rate of approximately 37.0%.
- The company expected to open approximately 90 to 95 new stores during fiscal 2012.
- Management believed cash balances, operating cash flow, available credit, leases and trade credit would fund operations and planned capital needs over the next several years.
- On August 1, 2012, the board declared a $0.20 quarterly dividend payable September 5, 2012. Future dividends remain subject to board discretion.
- After quarter-end, the company entered into approximately $30 million of construction commitments for a new distribution center in Macon, Georgia. Other disclosed commitments included approximately $3.1 million for new-store construction, $13.3 million for facility property and $0.5 million to purchase a previously leased store.
- The company was engaged in discussions with the Department of Justice and EPA regarding alleged Clean Air Act violations involving certain imported engines. Management did not expect the matter to have a material adverse effect and did not believe a loss above the accrued amount was reasonably possible.
- Principal risks include consumer spending, competition, weather and seasonality, inflation and commodity costs, store expansion and execution, foreign suppliers, labor, technology and supply-chain disruptions, regulation, litigation, tax-rate changes and internal controls.
Important facts for investors to verify
- Whether same-store sales growth remains positive after separating inflation from underlying unit demand.
- Whether gross-margin gains persist as product mix, commodity costs and pricing conditions change.
- Inventory growth relative to sales and the risk of markdowns or working-capital pressure.
- Execution and returns from the planned 90 to 95 store openings and the Macon distribution-center investment.
- Use of the remaining share-repurchase authorization alongside dividends and expansion spending.
- Resolution and ultimate cost of the EPA/DOJ engine matter and other legal contingencies.
- Compliance with credit-facility covenants and continued availability of liquidity despite $65.1 million of disclosed letters of credit.