Tractor Supply Company 2010 Q3 Form 10-Q Summary
Business context and reporting period
Tractor Supply Company filed this unaudited Form 10-Q for the fiscal quarter ended September 25, 2010, covering the three and nine months ended September 25, 2010, compared with the corresponding periods ended September 26, 2009. The company operates a highly seasonal retail business; sales and profits are generally strongest in the second and fourth quarters, while inventory and accounts payable are typically elevated in the first and third quarters.
The company operated 976 stores at September 25, 2010, compared with 912 stores a year earlier. It opened 47 stores during the first nine months of 2010 and closed one store.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2009 | First nine months 2010 | First nine months 2009 |
|---|---|---|---|---|
| Net sales | $829.1 million | $747.7 million | $2.606 billion | $2.344 billion |
| Gross margin | $279.1 million; 33.7% | $246.0 million; 32.9% | $866.8 million; 33.3% | $749.3 million; 32.0% |
| Operating income | $50.9 million | $35.8 million | $187.6 million | $125.3 million |
| Net income | $32.0 million | $22.0 million | $117.8 million | $77.2 million |
| Diluted EPS | $0.43 | $0.30 | $1.58 | $1.06 |
| Net cash from operations | Not separately reported | Not separately reported | $94.5 million | $111.0 million |
Third-quarter same-store sales increased 5.0%, following a 5.1% decrease in the prior-year quarter. First-nine-month same-store sales increased 4.8%, compared with a 1.7% decrease in the prior-year period. Management attributed third-quarter sales strength primarily to consumable, usable and edible products, particularly animal and pet-related merchandise, as well as seasonal warm-weather items and apparel.
SG&A expense, including depreciation and amortization, improved to 27.5% of sales in the third quarter from 28.1% a year earlier and to 26.1% for the first nine months from 26.6%. The effective income tax rate was 37.0% in both 2010 periods, compared with 37.8% in the comparable 2009 periods.
At September 25, 2010, cash and cash equivalents were $170.9 million, short-term investments were $15.9 million, inventory was $758.7 million and working capital was $528.5 million. Total assets were $1.428 billion and total liabilities were $581.7 million.
The company had no borrowings under its $350 million unsecured senior credit facility. It had $30.2 million of outstanding letters of credit, was in compliance with all debt covenants, and had capital lease obligations totaling approximately $1.5 million.
Capital expenditures were $67.1 million for the first nine months of 2010, compared with $49.4 million in the prior-year period. Investing activities used $82.7 million, including the purchase of a $15.9 million one-year U.S. Treasury note. Financing activities used $13.7 million, including $22.9 million of share repurchases and $15.3 million of cash dividends paid.
Material changes versus the prior comparable period
- Third-quarter sales increased 10.9%; first-nine-month sales increased 11.1%.
- Third-quarter net income increased 45.7%; first-nine-month net income increased 52.6%.
- Diluted EPS increased from $0.30 to $0.43 in the third quarter and from $1.06 to $1.58 for the first nine months. Per-share amounts reflect the September 2010 two-for-one stock split.
- Gross margin expanded by 80 basis points in the third quarter and 130 basis points for the first nine months, primarily from improved direct product margins and a lower LIFO provision.
- Operating cash flow declined by $16.5 million to $94.5 million despite higher earnings, principally because of increased inventory, payment timing and related working-capital investment.
- Inventory increased $54.7 million from September 2009 and $157.5 million from year-end 2009, reflecting new stores, seasonality and strategic investment in “never out of stock” and essential seasonal merchandise.
- The company opened fewer stores through the first nine months than in the prior year, but management indicated that openings shifted into the fourth quarter.
- The company began paying a quarterly cash dividend of $0.07 per share in 2010 and repurchased $22.9 million of common stock during the first nine months, compared with $10.8 million in the prior-year period.
Guidance, outlook, risks, contingencies and unusual items
Management expected to open approximately 25 to 27 new stores in the fourth quarter of 2010. It stated that existing cash, operating cash flow, available revolving-credit capacity and normal trade credit should be sufficient to fund operations, expansion, remodeling and relocation needs over the next several years.
The company’s $400 million share-repurchase authorization runs through December 2011; approximately $158.1 million remained available at September 25, 2010. Management stated its present intention to continue the quarterly dividend, subject to future board approval and the company’s earnings, financial condition and capital needs.
Principal risks include seasonality, weather, consumer spending, competition, commodity and purchase-price volatility, foreign sourcing, vendor availability, store expansion execution, employee retention, product liability, tax matters, information systems and internal controls. The company stated that no material changes had occurred to the risk factors disclosed in its 2009 Form 10-K.
The EPA requested information concerning whether the importation or sale of certain motorized merchandise violated the Clean Air Act. No complaint had been filed, and the company could not determine the extent of any potential liability. Ordinary-course litigation was not expected to have a material adverse effect, although future periods could be affected by changes in circumstances.
The company had approximately $8.1 million of construction commitments for new stores and a distribution center. A $16.0 million letter of credit outside the credit facility was collateralized by the short-term Treasury investment. A new warehouse management system generated increased distribution-center capital spending. The company also adopted specified accounting guidance during 2010 without a material impact on its financial statements.
Important facts for investors to verify
- Whether inventory growth and the related working-capital investment convert into seasonal sales and operating cash flow.
- The sustainability of gross-margin expansion, including the effects of sourcing, pricing, markdown management, LIFO assumptions and commodity costs.
- Execution of the planned fourth-quarter store openings and the returns generated by the expanded store base.
- The company’s ability to maintain liquidity while funding capital expenditures, dividends and share repurchases.
- Future obligations and covenant terms under the senior credit facility, which matures in February 2012.
- Developments in the EPA inquiry and any effect on legal liabilities or operating results.
- Weather, consumer-spending conditions and other seasonal factors affecting fourth-quarter performance.