Business Context and Reporting Period
Tractor Supply Company reported unaudited results for the fiscal quarter and six months ended June 26, 2010, compared with the periods ended June 27, 2009. The company operated 967 stores at quarter-end, versus 895 a year earlier, after opening 19 stores during the quarter and 38 during the first six months. Results are highly seasonal, with sales and profits historically strongest in the second and fourth quarters.
Financial Performance and Liquidity
| Metric | Q2 2010 | Q2 2009 | Change |
|---|---|---|---|
| Net sales | $1,065.7 million | $946.5 million | +12.6% |
| Same-store sales | +6.1% | -2.7% | Improved |
| Gross margin | $358.8 million; 33.7% | $302.2 million; 31.9% | +180 bps |
| Operating income | $122.3 million | $88.3 million | +38.5% |
| Net income | $76.5 million | $54.8 million | +39.7% |
| Diluted EPS | $2.05 | $1.50 | +36.7% |
| Six-month metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $1,776.6 million | $1,596.7 million | +11.3% |
| Same-store sales | +4.7% | Flat | Improved |
| Gross margin | $587.7 million; 33.1% | $503.2 million; 31.5% | +160 bps |
| Operating income | $136.7 million | $89.5 million | +52.8% |
| Net income | $85.8 million | $55.2 million | +55.3% |
| Diluted EPS | $2.31 | $1.51 | +53.0% |
For the first six months, net cash provided by operating activities was $71.0 million, down from $96.5 million, primarily because inventory increased $101.2 million from year-end and working-capital requirements were higher. Capital expenditures were $36.9 million, versus $34.1 million, and investing activities used $52.6 million, including a $15.9 million purchase of a one-year U.S. Treasury note.
At June 26, 2010, cash and cash equivalents were $181.1 million, short-term investments were $15.9 million, working capital was $505.3 million, and total assets were $1.36 billion. Total liabilities were $546.9 million and stockholders’ equity was $816.4 million. There were no borrowings under the $350 million unsecured revolving credit facility; $29.5 million of letters of credit were outstanding. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected a 6.1% second-quarter same-store sales increase, new-store growth, and strong demand in animal and pet-related, agricultural, seasonal, and outdoor power equipment categories.
- Gross margin improved primarily through expanded direct product margin, strategic sourcing, pricing and markdown management, lower shrink, and a lower LIFO charge.
- SG&A, including depreciation and amortization, improved to 22.2% of sales from 22.6% in the quarter and to 25.4% from 25.9% for the six-month period, reflecting operating leverage and expense control.
- The effective tax rate declined to 37.3% in the quarter and 37.0% for the six months from 37.8% in both prior-year periods, primarily due to a tax benefit related to disqualified dispositions of incentive stock options.
- The company began paying quarterly cash dividends of $0.14 per share in 2010 and repurchased $13.7 million of common stock during the first six months, compared with $9.9 million in the prior-year period.
- Inventory rose to $702.4 million from $644.9 million a year earlier, reflecting new stores, higher average inventory per store, and investments in “never out of stock” and spring merchandise.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide clear quantitative earnings or sales guidance. Management stated that existing cash, operating cash flow, available credit, and trade credit should be sufficient to fund operations, expansion, remodeling, relocations, and capital expenditures over the next several years. Management also indicated an intention to continue the quarterly dividend, subject to board approval and financial conditions.
- Principal risks include consumer spending, competition, weather, seasonality, commodity and transportation costs, inflation or deflation, foreign sourcing, vendor availability, labor retention, product liability, litigation, tax examinations, information systems, and internal controls.
- Unseasonable weather, excessive precipitation, drought, and early or late frosts can affect sales, although geographic diversification may mitigate some effects.
- Construction commitments were approximately $3.2 million, and commitments to purchase three previously leased stores totaled approximately $9.5 million.
- A $16.0 million letter of credit outside the revolving facility was collateralized by the $15.9 million Treasury note.
- Ordinary-course litigation was not expected to have a material adverse effect, although future results could be affected by changes in circumstances.
- On July 29, 2010, the board declared a further $0.14 per-share dividend and announced a two-for-one stock split effective September 2, 2010. Reported historical EPS and share data do not reflect the split.
- The company adopted ASC Topic 810 and ASU 2010-09 during 2010 without a material impact on financial position, results, cash flows, or disclosures.
Investor Verification Points
- Verify whether gross-margin expansion and SG&A leverage remain sustainable after the favorable quarter and amid commodity, freight, and competitive pricing pressures.
- Monitor inventory growth, vendor payment timing, and operating cash conversion, which weakened despite substantially higher earnings.
- Assess execution of the store expansion program, including 38 openings in the first six months and related construction and store-purchase commitments.
- Review the February 2012 maturity and covenant requirements of the revolving credit facility, even though no borrowings were outstanding at quarter-end.
- Adjust historical per-share comparisons for the announced two-for-one stock split when analyzing later periods.