Tractor Supply Company — Fiscal Q1 2013 Form 10-Q Summary
Business Context and Reporting Period
Tractor Supply Company operates as a single reportable segment selling farm and ranch products. The filing covers the 13 weeks ended March 30, 2013, compared with the 13 weeks ended March 31, 2012. The company operated 1,197 stores at quarter-end, after opening 22 stores and closing one.
Financial Performance and Position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $1,085.8 million | $1,020.4 million | 6.4% increase |
| Same-store sales | 0.5% increase | 11.5% increase | Deceleration |
| Gross margin | $352.1 million; 32.4% | $332.8 million; 32.6% | 5.8% increase; 20-basis-point rate decline |
| Operating income | $67.9 million | $64.4 million | 5.5% increase |
| Net income | $44.0 million | $40.3 million | 9.1% increase |
| Diluted EPS | $0.62 | $0.55 | Increase |
| Net cash used in operations | $(95.3) million | $(20.3) million | Greater use of cash |
| Capital expenditures | $49.3 million | $31.8 million | Increase |
SG&A, including depreciation and amortization, was $284.2 million, or 26.1% of sales, compared with 26.3% in the prior-year quarter. The effective tax rate declined to 35.0% from 36.8%. Management expects a full-year effective tax rate of approximately 36.5%.
At March 30, 2013, cash and cash equivalents were $57.0 million, restricted cash was $8.4 million, inventory was $1,142.9 million, and working capital was $643.3 million. Total assets were $1.88 billion and total liabilities were $851.1 million.
The company had $105.0 million outstanding under its unsecured $250.0 million senior revolving credit facility, plus $46.0 million of letters of credit. The facility matures in October 2016, and the company was in compliance with all debt covenants. Cash dividends declared were $0.20 per share for the quarter.
Material Changes Versus the Prior Comparable Period
- Sales growth was primarily driven by 22 net new stores; sales from stores opened within the prior year contributed $62.1 million, or 6.1 percentage points, of total sales growth.
- Same-store sales increased only 0.5%, compared with 11.5% in Q1 2012. Strong animal- and pet-related consumables and winter seasonal merchandise were partly offset by weaker spring seasonal sales.
- Estimated inflation, principally in livestock feed and dry pet food, benefited same-store sales by approximately 140 basis points.
- Gross margin rate declined because of increased sales of lower-margin consumable products, weaker spring seasonal sales, and higher transportation costs.
- Operating cash flow deteriorated primarily because of a $234.8 million inventory build, timing of accounts payable and income tax payments, and seasonal purchasing.
- Financing cash flow increased to $62.8 million, principally because of $105.0 million in net revolver borrowings, partly offset by $49.9 million of share repurchases.
- The company repurchased 522,500 shares under its repurchase program for $49.9 million and had $241.3 million of remaining authorization at quarter-end.
- Capital expenditures increased to $49.3 million, including investments in distribution-center capacity, information technology, and store expansion.
Guidance, Outlook, Risks, and Unusual Items
- Management expected to open approximately 100 to 105 new stores during fiscal 2013 and believed available cash, operating cash flow, credit capacity, leases, and trade credit would fund operations and planned capital needs over the next several years.
- On May 1, 2013, the board declared a quarterly dividend of $0.26 per share, payable June 4, 2013.
- Seasonality and weather remain significant factors. Sales and profits are historically highest in the second and fourth quarters, while inventory and payables typically peak in the first and third quarters.
- Key risks include consumer spending, weather, commodity and transportation costs, competition, store expansion and location execution, foreign sourcing, labor availability, technology and supply-chain disruptions, regulatory matters, tax-rate changes, and litigation.
- The company was engaged in discussions with the DOJ and EPA regarding alleged Clean Air Act violations involving certain engines. Management expected penalties and injunctive relief could result but did not expect a material adverse effect; it intended to seek vendor reimbursement.
- Contractual construction commitments included approximately $7.6 million for a Macon, Georgia distribution center, $5.4 million for new-store construction, and $55.3 million for a new store support center.
- Effective April 1, 2013, an external letter of credit increased from $8.4 million to $18.3 million, and the related $8.4 million restricted cash balance was released.
Important Facts for Investors to Verify
- Whether the low 0.5% same-store sales growth improves after the prior-year comparison and changing seasonal conditions.
- Inventory productivity, markdown exposure, and the effect of consumable-product mix on gross margin.
- Cash conversion and working-capital needs as seasonal inventory is sold.
- Execution and funding of the planned store openings, Macon distribution center, and new store support center.
- Revolver utilization, available liquidity, interest-rate exposure, and covenant compliance.
- Resolution, potential penalties, and vendor reimbursement related to the EPA and DOJ matter.
- Continuation of the share repurchase and dividend programs relative to capital requirements.