Tractor Supply Company 2010 Form 10-K Summary
Business context and reporting period
Tractor Supply Company operates farm and ranch retail stores serving recreational farmers, ranchers, rural-lifestyle customers, tradesmen and small businesses. The company operated 1,001 stores in 44 states at December 25, 2010, including 26 Del’s Farm Supply stores, and also sold merchandise online through TractorSupply.com. Fiscal 2010 comprised 52 weeks and ended December 25, 2010.
Financial performance and key metrics
| Metric | Fiscal 2010 | Fiscal 2009 | Change |
|---|---|---|---|
| Net sales | $3.638 billion | $3.207 billion | +13.5% |
| Gross margin | $1.204 billion; 33.1% | $1.042 billion; 32.5% | +60 basis points |
| Operating income | $266.2 million; 7.3% | $191.6 million; 6.0% | +39.0% |
| Net income | $168.0 million; 4.6% | $119.7 million; 3.7% | +40.3% |
| Diluted EPS | $2.25 | $1.63 | +38.0% |
| Cash flow from operations | $222.6 million | $215.3 million | +$7.3 million |
| Capital expenditures | $96.5 million | $74.0 million | +$22.5 million |
Fourth-quarter net sales were $1.033 billion, operating income was $78.7 million, net income was $50.2 million and diluted EPS was $0.67. Fourth-quarter same-store sales increased 13.1%.
Fiscal 2010 same-store sales increased 7.0%, driven primarily by animal and pet-related consumables and seasonal products. Same-store transaction count increased 7.4%, while average transaction value declined 0.3%. The company opened 74 stores, closed three and did not relocate any stores.
Gross-margin expansion reflected improved direct product margins and lower shrink, partly offset by higher transportation costs. SG&A, including depreciation and amortization, improved to 25.8% of sales from 26.5%, primarily due to sales leverage and expense management. Net interest expense declined to $1.3 million from $1.6 million, and the effective tax rate declined to 36.6% from 36.9%.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $257.3 million at year-end, compared with $172.9 million in 2009. The company also held $15.9 million of short-term investments.
- Working capital increased to $617.1 million from $475.9 million, primarily because of higher cash and inventory.
- No borrowings were outstanding under the unsecured $350 million revolving credit facility. Outstanding letters of credit were $27.4 million, and the company was in compliance with all covenants.
- Net cash used in investing activities was $112.1 million; net cash used in financing activities was $26.0 million. Cash increased by $84.5 million during the year.
- The company repurchased approximately 0.8 million shares for $38.2 million and had $142.8 million remaining under its $400 million repurchase authorization at year-end.
- The company paid $20.4 million of dividends in 2010 and declared a quarterly dividend of $0.07 per share payable in March 2011.
- Contractual obligations totaled $1.580 billion, including $1.545 billion of operating lease commitments, $2.7 million of capital lease obligations and $32.2 million of purchase obligations.
Material changes versus the prior comparable period
- Sales growth accelerated materially, with same-store sales improving from a 1.1% decline in 2009 to a 7.0% increase in 2010.
- Profitability improved across gross margin, operating margin and net margin, supported by stronger sales, sourcing and pricing initiatives, lower shrink and expense leverage.
- Inventory increased to $736.5 million from $676.5 million, primarily reflecting store growth; average inventory per store remained approximately flat.
- Capital spending increased, particularly for distribution-center capacity and infrastructure.
- The company initiated quarterly cash dividends in 2010; no dividends were declared in 2009.
- Effective December 25, 2010, the company changed inventory accounting from LIFO to average cost and retrospectively adjusted prior periods. The change increased previously reported 2009 net income by $4.3 million and 2008 net income by $26.1 million.
- A two-for-one stock split became effective September 2, 2010; all share and per-share amounts in the filing reflect the split.
Outlook, management commentary, risks and unusual items
Management projected 80 to 85 new stores in fiscal 2011, an increase of approximately 8%, and estimated 2011 capital expenditures of $150 million to $160 million. Planned spending includes a new 834,000-square-foot Kentucky distribution center, expected to become operational in the fourth quarter of 2011, a warehouse-management system and other information-technology upgrades. Management stated that cash balances, operating cash flow, available credit and trade credit should fund operations and planned expansion for the next several years.
The business is highly seasonal, with sales and profits generally strongest in the second and fourth quarters and inventory and accounts payable typically highest in the first and third quarters. Key risks include consumer spending and economic conditions, weather, commodity and transportation-cost volatility, competition, execution of rapid store expansion, inventory markdowns, labor costs, foreign sourcing, information-system failures or privacy breaches, regulatory compliance, tax audits and litigation.
In the first quarter of fiscal 2011, the Department of Justice, on behalf of the EPA, alleged potential Clean Air Act violations involving imported engines. The company was negotiating a settlement involving a civil penalty and injunctive relief and expected vendor reimbursement under indemnification agreements. Management did not expect the matter to have a material adverse effect, although the final settlement amount was not provided in the filing.
Fiscal 2010 included a $1.1 million impairment charge for certain capitalized software costs. No goodwill impairment was identified. The company’s independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Most important facts for an investor to verify
- Whether the planned 80 to 85 store openings and $150 million to $160 million of 2011 capital expenditures were achieved without weakening returns or liquidity.
- The final resolution, penalty and potential reimbursement related to the EPA and DOJ engine matter.
- Whether same-store sales and gross-margin gains were sustained after the unusually strong 2010 rebound.
- Inventory productivity, shrink, markdown exposure and the effect of commodity, freight and vendor-support changes on gross margin.
- Availability and renewal terms of the revolving credit facility, which was scheduled to mature in February 2012, and compliance with its financial covenants.
- The impact of operating lease commitments and the Kentucky distribution-center investment on future cash flow.
- The comparability of historical earnings and balance-sheet data after the retrospective LIFO-to-average-cost accounting change and the two-for-one stock split.