Tractor Supply Company — Fiscal Q2 2023 Form 10-Q
Reporting period: Fiscal quarter and six months ended July 1, 2023, compared with periods ended June 25, 2022. Tractor Supply operated 2,373 stores in 49 states, including 2,181 Tractor Supply and Orscheln stores and 192 Petsense stores. The Company operates one reportable segment focused on rural-lifestyle retailing.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Net sales | $4.185 billion | $3.903 billion | +7.2% |
| Gross profit | $1.515 billion | $1.386 billion | +9.3% |
| Gross margin | 36.2% | 35.5% | +69 bps |
| Operating income | $559.3 million | $525.0 million | +6.5% |
| Net income | $421.2 million | $396.5 million | +6.2% |
| Diluted EPS | $3.83 | $3.53 | +8.5% |
For the first six months, sales increased 8.0% to $7.484 billion, gross profit increased 9.9% to $2.685 billion, gross margin expanded to 35.9% from 35.3%, operating income increased 4.5% to $803.8 million, and net income increased 3.5% to $604.3 million. Diluted EPS increased to $5.47 from $5.17. The six-month effective tax rate declined to 22.4% from 22.7%.
Cash flow and liquidity: Six-month operating cash flow was $782.3 million, up from $625.6 million. Capital expenditures were $349.6 million, compared with $265.3 million, resulting in reported investing cash use of $344.5 million. Cash and cash equivalents were $620.0 million at July 1, 2023, versus $202.5 million at December 31, 2022. Working capital was $1.340 billion.
Debt: Total borrowings were $1.750 billion before discounts and issuance costs, or $1.728 billion net, compared with $1.178 billion and $1.164 billion, respectively, at year-end 2022. The increase primarily reflects the May 2023 issuance of $750 million of 5.25% senior notes due 2033. The Company had $200 million outstanding under its revolving credit facility and $60.2 million of letters of credit. Management stated that all debt covenants were satisfied at July 1, 2023.
Shareholder returns: The Company repurchased approximately 1.6 million shares for $354.6 million during the first six months and paid $226.2 million in dividends. Remaining share-repurchase authorization was approximately $1.29 billion. The quarterly dividend was increased to $1.03 per share, and the Board declared another $1.03 dividend payable September 12, 2023.
Material changes versus the prior comparable period
- Comparable-store sales increased 2.5% in Q2 and 2.3% for the first six months, slower than the respective 5.5% and 5.4% increases in the prior-year periods.
- Comparable transaction count increased 1.8% in Q2 and 0.7% for the first six months; comparable transaction value increased 0.6% and 1.6%, respectively.
- Sales benefited from the Orscheln acquisition, new stores, and comparable-store growth. Sales from stores open less than one year contributed $199.1 million in Q2 and $339.6 million in the first six months.
- Gross margin improved because of lower transportation costs, supply-chain improvement, distribution-center efficiencies, and pricing initiatives, partly offset by product mix.
- SG&A, including depreciation and amortization, increased to 22.8% of sales in Q2 from 22.1% and to 25.1% for the first six months from 24.2%. Planned growth investments, a new distribution center, higher depreciation and amortization, and higher medical claims pressured expenses.
- Capital expenditures increased substantially to support store growth, remodels, distribution-center capacity, and information technology.
- Financing cash use declined to $20.3 million from $707.7 million, primarily because of net debt borrowings and lower share repurchases, partly offset by higher dividends.
Guidance, outlook, risks, and unusual items
- Fiscal 2023 capital expenditures were estimated at $800 million to $850 million. Plans included approximately 70 new Tractor Supply stores, completion of Orscheln conversions, Project Fusion remodels and garden-center transformations, and 10 to 15 new Petsense stores.
- Management expects existing cash, operating cash flow, debt capacity, leases, trade credit, and access to debt markets to fund operations and planned capital needs for the foreseeable future. The filing does not provide a clear full-year sales or EPS guidance figure in the supplied text.
- Demand remained stronger for core consumable, usable, and edible products, while seasonal merchandise and big-ticket items were softer. Weather and seasonality can shift sales and profits between quarters.
- The Company had approximately $76.0 million of commitments related to construction and onboarding of new distribution centers and had anticipated sale-leaseback transactions involving ten existing stores.
- U.S. Customs proposed that certain China imports may be subject to anti-dumping and countervailing duties. Management expects resolution without a material adverse effect, but acknowledges uncertainty.
- The Company agreed to sell the Orscheln headquarters and distribution center to Bomgaars for $10 million within 15 months of the October 2022 acquisition. The Orscheln purchase price was approximately $393.4 million, with preliminary goodwill of $211.6 million.
- The Company stated that there were no material changes to previously disclosed risk factors and no material changes in market-risk disclosures. Disclosure controls were determined to be effective.
Investor verification points
- Verify the sustainability of comparable-store sales growth as seasonal and discretionary demand remains soft.
- Monitor gross-margin benefits from freight and supply-chain improvements against product mix, inflation, and promotional pressure.
- Assess the effect of increased debt, including the $750 million 5.25% notes and variable-rate revolver borrowings, on interest expense and leverage.
- Track execution and returns from Orscheln conversions, new stores, remodels, and distribution-center investments.
- Review capital-allocation priorities among capital expenditures, dividends, and the remaining $1.29 billion repurchase authorization.
- Follow the U.S. Customs AD/CV-duty matter, sale-leaseback plans, distribution-center commitments, and other litigation or contingencies.