Tractor Supply Company 10-Q Summary
Business Context and Reporting Period
Tractor Supply Company operates one reportable segment: retail sales of farm and ranch products. This report covers the fiscal three months ended March 31, 2012, compared with the fiscal three months ended March 26, 2011. The company operated 1,117 stores at March 31, 2012, versus 1,027 stores a year earlier, reflecting 33 openings and one closure during the quarter.
Operations are highly seasonal, with the highest sales and profits historically occurring in the second and fourth quarters. First-quarter inventory and accounts payable typically increase in preparation for the spring selling season.
Financial Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $1,020.4 million | $836.6 million | +22.0% |
| Same-store sales | +$961.5 million; +11.5% | +10.7% | Improved |
| Gross margin | $332.8 million; 32.6% | $273.6 million; 32.7% | +21.6%; down 10 bps |
| Operating income | $64.4 million; 6.3% of sales | $28.8 million; 3.4% of sales | +124.0% |
| Net income | $40.3 million; 4.0% of sales | $18.3 million; 2.2% of sales | +120.0% |
| Diluted EPS | $0.55 | $0.24 | +129.2% |
| Net cash used in operating activities | $(20.3) million | $(44.8) million | Improved by $24.5 million |
| Capital expenditures | $31.8 million | $28.9 million | Increased |
Gross margin was pressured by winter-seasonal markdowns, higher transportation costs and strong sales of lower-margin big-ticket products, partly offset by favorable inventory shrink. SG&A, including depreciation and amortization, improved to 26.3% of sales from 29.3%, primarily because higher comparable-store sales leveraged payroll and occupancy costs.
At March 31, 2012, cash and cash equivalents were $126.7 million, restricted cash was $21.9 million and working capital was $666.6 million. Inventories were $1.032 billion, up from $941.4 million a year earlier, principally due to new stores and seasonal inventory purchases.
The company had no borrowings under its unsecured $250 million Senior Credit Facility and had $23.0 million of outstanding letters of credit under the facility. An additional $21.9 million letter of credit was collateralized by restricted cash. The facility matures in October 2016, and the company was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales benefited from 8.8% store growth, an additional week of spring sales related to the fiscal-calendar shift, early spring weather and approximately 400 basis points of inflation in consumable, usable and edible categories.
- Same-store sales increased 11.5%, compared with 10.7% in the prior-year quarter.
- Net income more than doubled, while diluted EPS increased to $0.55 from $0.24.
- Gross margin percentage declined modestly despite higher gross profit.
- Operating cash use improved, but inventory increased $90.4 million year over year and remained a significant use of cash.
- Capital expenditures increased to $31.8 million, including $18.2 million for new and relocated stores and $6.5 million for information technology.
- Share repurchases fell sharply to $4.1 million from $53.1 million. The company repurchased 54,700 shares under the program and had $558.7 million of remaining authorization at quarter-end.
- The quarterly dividend increased to $0.12 per share from $0.07 per share. On May 2, 2012, the board declared a subsequent quarterly dividend of $0.20 per share.
Guidance, Outlook, Risks and Unusual Items
- Management expected to open approximately 90 to 95 new stores during fiscal 2012.
- Management stated that existing cash, expected operating cash flow, available revolver capacity, leases and normal trade credit should fund operations and planned capital needs over the next several years.
- Management expected the full-year effective income tax rate to be approximately 36.8%, although the quarter benefited from tax effects related to disqualified incentive stock options.
- Key risks include seasonality, weather, consumer spending, competition, purchase-price and transportation-cost volatility, foreign-supplier dependence, labor availability, technology and supply-chain execution, regulatory changes, tax matters and litigation.
- The company was engaged in settlement discussions with the Department of Justice and EPA concerning alleged Clean Air Act violations involving certain imported engines. The company expected vendor indemnification and did not expect a material adverse effect; it stated that a loss in excess of the amount accrued was not reasonably possible.
- Construction commitments for new stores were approximately $2.9 million, and the company had a $2.4 million commitment to purchase one previously leased store.
- Recently adopted accounting standards concerning comprehensive-income presentation and goodwill impairment had no impact on the financial statements.
Important Facts for Investors to Verify
- Whether strong same-store sales and early spring weather trends persisted beyond the first quarter.
- Inventory growth, markdown activity and gross-margin performance as seasonal merchandise sells through.
- Progress toward the planned 90 to 95 store openings and the associated capital and operating costs.
- Operating cash flow conversion, particularly the effect of inventory purchases and vendor-payment timing.
- Availability under the Senior Credit Facility, outstanding letters of credit and compliance with covenants.
- The final resolution, accrued amount and vendor reimbursement related to the EPA and DOJ engine matter.
- The sustainability of the higher dividend and any future share repurchases relative to cash generation and expansion requirements.