Business Context and Reporting Period
Tractor Supply Company filed this unaudited Form 10-Q for the fiscal three months ended March 29, 2014, compared with March 30, 2013. The company operates one reportable segment: retail sales of products serving customers with a rural lifestyle. Store count increased to 1,308 from 1,197, including 32 new stores opened during the quarter.
Financial Performance and Liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net sales | $1.184 billion | $1.086 billion | +9.0% |
| Comparable-store sales | +2.2% | +0.5% | +170 basis points |
| Gross profit | $396.2 million | $352.1 million | +12.5% |
| Gross margin | 33.5% | 32.4% | +110 basis points |
| Operating income | $78.7 million | $67.9 million | +15.9% |
| Net income | $48.8 million | $44.0 million | +10.9% |
| Diluted EPS | $0.35 | $0.31 | +12.9% |
| Net cash used in operating activities | $38.1 million | $95.3 million | Improved by $57.2 million |
| Capital expenditures | $41.9 million | $49.3 million | Down $7.5 million |
Operating margin was approximately 6.7%, compared with 6.3% in the prior-year quarter. Net margin was approximately 4.1% in both periods. SG&A, including depreciation and amortization, rose to $317.5 million from $284.2 million and increased to 26.8% of sales from 26.1%.
Cash and cash equivalents were $47.8 million at March 29, 2014, compared with $142.7 million at December 28, 2013 and $57.0 million at March 30, 2013. Inventories were $1.225 billion, up from $979.3 million at year-end and $1.143 billion a year earlier, primarily reflecting seasonal and new-store inventory builds. Working capital was $694.7 million.
The company had $80.0 million outstanding under its $250 million unsecured Senior Credit Facility, which matures in October 2016, plus $42.6 million of letters of credit under the facility. An additional $18.3 million letter of credit was outstanding outside the facility. The company was in compliance with all debt covenants. Management stated that available cash, operating cash flow, credit availability, leases and trade credit should fund operations and planned capital needs through fiscal 2014.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected 2.2% comparable-store sales growth and $73.4 million of sales from new stores; new stores contributed approximately 6.8 percentage points of total sales growth.
- Gross margin expanded primarily because of retail price management in consumable, usable and edible products and stronger winter-goods sell-through, which reduced markdowns.
- SG&A deleveraged because of new-store growth, higher distribution-center costs and weather-related utilities, snow removal and building repairs.
- The effective tax rate increased to 37.6% from 35.0%, as the prior-year quarter benefited from a reserve reversal for uncertain tax positions and reinstatement of the federal Work Opportunity Tax Credit.
- Operating cash use improved, principally because of the timing of estimated income tax payments, although inventory purchases remained a substantial cash use.
- Share repurchases increased to $84.5 million for 1.3 million shares from $49.9 million for 1.0 million shares. The board increased total repurchase authorization to $2.0 billion through December 2017; $1.08 billion remained authorized at quarter-end.
- The quarterly dividend increased to $0.13 per share from $0.10. On April 30, 2014, the board declared a subsequent $0.16 per-share dividend.
Guidance, Outlook, Risks and Unusual Items
- Management expected approximately 102 to 106 new stores in fiscal 2014, compared with 102 new stores opened in fiscal 2013.
- The new store support center in Brentwood, Tennessee, was expected to be completed in the third quarter of fiscal 2014. Construction commitments were approximately $9.0 million at quarter-end.
- Management expected the full-year 2014 effective tax rate to be approximately 37.0%.
- The business is seasonal, with historically higher sales and profits in the second and fourth quarters and elevated inventory and accounts payable in the first and third quarters.
- Weather, consumer spending, competition, commodity and purchase-price volatility, foreign sourcing, new-store execution, employee retention, technology and supply-chain disruptions, regulatory matters, litigation and tax-rate changes may materially affect results.
- The company self-insures significant portions of employee medical, workers’ compensation and general liability risks. Net self-insurance reserves were $41.8 million at March 29, 2014.
- The company was engaged in settlement discussions with the DOJ and EPA regarding alleged Clean Air Act violations involving certain imported engines. Management did not expect a material adverse effect and did not believe a loss above the accrued amount was reasonably possible.
- Disclosure controls and procedures were deemed effective, and management reported no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Whether comparable-store sales and gross-margin gains persist after seasonal and weather-related benefits.
- Inventory growth, markdown exposure and working-capital cash requirements as the spring selling season progresses.
- The pace and economics of planned store openings and completion costs for the new store support center.
- Cash generation after capital expenditures, dividends and continued share repurchases.
- Credit-facility utilization, interest-rate exposure, letters of credit and compliance with debt covenants.
- The ultimate resolution and accrued amount associated with the EPA/DOJ matter and other self-insurance or litigation contingencies.
- Whether the anticipated approximately 37.0% full-year tax rate is achieved.