Tractor Supply Company — Fiscal 2016 Second-Quarter Form 10-Q
Business context and reporting period
Tractor Supply Company operates rural lifestyle retail stores and sells related products online. As of June 25, 2016, it operated 1,542 stores in 49 states. The filing covers the fiscal quarter and six months ended June 25, 2016, compared with June 27, 2015; interim financial statements are unaudited.
Financial performance and key metrics
| Metric | Three months ended June 25, 2016 | Three months ended June 27, 2015 | Six months ended June 25, 2016 | Six months ended June 27, 2015 |
|---|---|---|---|---|
| Net sales | $1.853 billion | $1.773 billion | $3.320 billion | $3.104 billion |
| Gross profit | $649.2 million | $625.3 million | $1.144 billion | $1.070 billion |
| Gross margin | 35.0% | 35.3% | 34.4% | 34.4% |
| Operating income | $249.2 million | $245.2 million | $357.4 million | $338.0 million |
| Operating margin | 13.5% | 13.8% | 10.8% | 10.9% |
| Net income | $156.4 million | $153.3 million | $224.1 million | $211.4 million |
| Diluted EPS | $1.16 | $1.12 | $1.66 | $1.54 |
| Net margin | 8.4% | 8.6% | 6.7% | 6.8% |
For the first six months, operating cash flow was $267.9 million versus $233.4 million in the prior-year period. Capital expenditures were $101.0 million, primarily for new and relocated stores, existing-store improvements, information technology and distribution capacity. Net cash used in financing activities was $79.7 million, including $106.9 million of share repurchases and $58.8 million of dividends.
Cash and cash equivalents totaled $151.1 million at June 25, 2016, compared with $63.8 million at December 26, 2015 and $56.3 million at June 27, 2015. Working capital was $864.1 million. Inventories were $1.366 billion, up from $1.284 billion at fiscal year-end and $1.293 billion in the prior-year comparable period.
Total debt consisted primarily of $197.5 million outstanding under the new 2016 Senior Credit Facility, net of approximately $1.3 million of debt issuance costs, plus capital lease obligations. The facility includes a $200 million term loan and a $500 million revolving facility; no revolving borrowings were outstanding. Letters of credit totaled $50.5 million. The Company was in compliance with all debt covenants.
Material changes versus the prior comparable period
- Second-quarter sales increased 4.5%, while first-half sales increased 7.0%.
- Second-quarter comparable-store sales declined 0.5%, driven by a 1.9% decrease in average ticket, partially offset by a 1.5% increase in transaction count. First-half comparable-store sales increased 1.9%.
- Second-quarter net income increased 2.0% and diluted EPS increased to $1.16 from $1.12. First-half net income increased 6.0% and diluted EPS increased to $1.66 from $1.54.
- Second-quarter gross margin declined 30 basis points because of targeted pricing initiatives, product mix and higher freight costs. First-half gross margin was unchanged at 34.4%.
- SG&A, including depreciation and amortization, increased to 21.6% of sales in the second quarter from 21.4%, and to 23.7% for the first six months from 23.6%, reflecting lower comparable-store sales and costs from new distribution facilities.
- The effective tax rate decreased to 36.8% from 37.2%, primarily because of federal and state tax incentives.
- The Company opened 58 stores in the first six months and ended the period with 1,542 stores, compared with 1,438 stores a year earlier.
Guidance, outlook, risks and unusual items
Management expected to open approximately 115 to 120 stores during fiscal 2016, compared with 114 openings in fiscal 2015, and expected a full-year effective tax rate of approximately 36.8%. Management believed available cash, operating cash flow, credit capacity, leases and trade credit would fund operations and planned capital needs through fiscal 2016.
Cooler-than-average spring weather negatively affected seasonal products, lawn and garden categories and big-ticket items, while livestock and pet consumables performed well. The business is seasonal, with sales and profits historically highest in the second and fourth quarters.
On February 19, 2016, the Company entered into the new unsecured credit facility maturing in 2021. It entered into an interest-rate swap effective March 31, 2016, with a $197.5 million notional amount, to hedge variable-rate term-loan cash flows. The swap had a $2.5 million fair-value liability, excluding accrued interest, and generated $1.362 million of after-tax other comprehensive loss.
The Company had no material construction commitments extending beyond twelve months. Ordinary-course litigation was not expected to have a material adverse effect. Key risks include consumer spending, weather and seasonality, competition, store expansion, inventory and freight costs, foreign sourcing, employee retention, information-system disruption or data breaches, regulatory and tax matters, legal proceedings and changes in accounting standards.
The Company adopted debt issuance-cost presentation guidance and retrospectively adopted deferred-tax classification guidance during fiscal 2016. It was assessing the future effects of revenue-recognition, lease and stock-compensation standards.
Important facts for investors to verify
- Whether weak second-quarter comparable-store sales and lower average ticket persist after the weather-related disruption.
- Whether inventory growth and slower inventory turns lead to markdown pressure or additional working-capital needs.
- The effect of new distribution facilities, freight costs and store expansion on operating leverage and margins.
- Debt repayment requirements, variable-rate exposure, interest-rate-swap performance and compliance with credit covenants.
- The sustainability of share repurchases and quarterly dividends given capital expenditures and new borrowing.
- Fiscal 2016 store-opening execution and the expected 115-to-120 new-store program.
- The eventual impact and transition method for the pending revenue-recognition and lease accounting standards.