Tractor Supply Company 2012 Q3 Form 10-Q Summary
Business context and reporting period
Tractor Supply Company operates one reportable segment: retail sales of farm and ranch products. The filing covers the fiscal quarter and nine months ended September 29, 2012, compared with September 24, 2011. The business is highly seasonal, with sales and profits generally highest in the second and fourth fiscal quarters. The company operated 1,151 stores at September 29, 2012, versus 1,054 stores at September 24, 2011.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $1.066 billion | $977.8 million | $3.378 billion | $2.993 billion |
| Gross margin dollars | $357.2 million | $327.6 million | $1.141 billion | $1.004 billion |
| Gross margin rate | 33.5% | 33.5% | 33.8% | 33.5% |
| Operating income | $77.8 million | $68.1 million | $312.0 million | $241.2 million |
| Net income | $50.0 million | $42.7 million | $197.0 million | $152.2 million |
| Diluted EPS | $0.69 | $0.58 | $2.69 | $2.05 |
| Net cash from operating activities | Not separately provided | Not separately provided | $155.8 million | $111.3 million |
Q3 net sales increased 9.0%, net income increased 17.1%, and diluted EPS increased 19.0%. Nine-month net sales increased 12.9%, net income increased 29.4%, and diluted EPS increased 31.2%. Q3 operating margin was approximately 7.3%, compared with approximately 7.0% in the prior-year quarter. Nine-month operating margin was approximately 9.2%, compared with approximately 8.1% in the prior-year period.
Q3 same-store sales increased 2.9%; management estimated that inflation contributed approximately 185 basis points. Nine-month same-store sales increased 5.5%, with inflation contributing approximately 285 basis points. New-store growth was approximately 9.2%, representing a net increase of 97 stores year over year. The company opened 17 stores and closed one in Q3, and opened 68 stores and closed two during the first nine months.
Balance sheet, cash flow, debt, and liquidity
- Cash and cash equivalents were $70.2 million at September 29, 2012, compared with $177.0 million at December 31, 2011 and $96.6 million at September 24, 2011.
- Inventories were $1.020 billion, up from $830.8 million at year-end 2011 and $913.7 million at the prior-year quarter-end, reflecting store growth and seasonal cold-weather inventory purchases.
- Working capital was $619.9 million, down $9.7 million from year-end 2011 but up $50.3 million from the prior-year quarter-end.
- Operating activities generated $155.8 million during the first nine months, while capital expenditures were $111.2 million. Investing activities used $97.4 million.
- Financing activities used $165.2 million, including $163.8 million of share repurchases and $37.2 million of dividends paid. Cash decreased by $106.8 million during the first nine months.
- The company had no borrowings under its unsecured $250 million Senior Credit Facility, which matures in October 2016. Outstanding letters of credit totaled $41.4 million under the facility, plus $6.2 million outside the facility secured by restricted cash.
- The company was in compliance with all debt covenants and stated that existing cash, operating cash flow, available credit, leases, and trade credit should fund operations and planned capital expenditures over the next several years.
- Debt obligations were minimal: capital lease obligations totaled approximately $1.3 million, excluding the current portion.
Material changes versus the prior comparable period
- Sales benefited from 97 additional stores, broad-based same-store sales growth, strong consumable, usable and edible merchandise performance, and product inflation.
- Q3 gross margin rate was unchanged at 33.5%, while the nine-month rate improved 30 basis points to 33.8%. Management cited product mix, improved shrink, strategic sourcing, inventory management, private branding, and pricing initiatives.
- Q3 selling, general and administrative expenses, including depreciation and amortization, improved by 30 basis points as a percentage of sales to 26.2%. Nine-month SG&A, including depreciation and amortization, improved 90 basis points to 24.6%.
- The Q3 effective tax rate declined to 35.5% from 36.7%, primarily due to a favorable provision-to-return reconciliation and reversal of uncertain-tax-position reserves. The nine-month rate increased slightly to 36.7% from 36.6%.
- Share repurchases declined to 1.84 million shares costing $163.8 million during the first nine months, compared with 2.96 million shares costing $172.1 million in the prior-year period. Remaining authorization was $399.1 million through April 2015.
- Quarterly dividends increased to $0.20 per share from $0.12 in the comparable prior-year quarter. A further $0.20 per-share dividend was declared on October 31, 2012.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected the full-year effective income tax rate to be approximately 36.7%.
- Management expected to open 93 new stores during fiscal 2012.
- Capital expenditures included $43.7 million for new, relocated, and not-yet-opened stores; $20.4 million for information technology; and $10.4 million for distribution-center capacity and improvements. The company expected construction of a new store support center in Brentwood, Tennessee to begin by year-end.
- Contractual commitments included approximately $30 million for a new distribution center in Macon, Georgia, $5.6 million for other construction projects, and $1.8 million to purchase a previously leased store.
- The company is engaged in discussions with the Department of Justice and EPA regarding alleged Clean Air Act violations involving certain imported engines. A settlement could include a civil penalty and injunctive relief, but management did not expect a material adverse effect and stated that a loss above accrued amounts was not reasonably possible.
- Key risks include consumer spending, competition, weather, seasonality, inflation and commodity costs, new-store execution, foreign suppliers, employee retention, regulatory and litigation matters, technology and supply-chain disruptions, tax examinations, and internal-control or accounting changes.
- The company stated that no material changes had occurred in the risk factors previously disclosed in its 2011 Form 10-K. Disclosure controls were evaluated as effective, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether sales growth remains supported by sustainable comparable-store demand rather than inflation and new-store additions.
- Inventory levels, shrink, freight costs, and gross-margin performance as seasonal inventory sells through.
- Cash generation after capital expenditures, dividends, and share repurchases, given the decline in cash balances.
- Progress and final cost commitments for the Macon distribution center and Brentwood store support center.
- The resolution, accrued amount, and potential financial exposure related to the EPA and DOJ engine matter.
- Actual full-year tax rate, store openings, comparable-store sales, and capital expenditures relative to management’s stated expectations.