Tractor Supply Company — Fiscal 2020 Second-Quarter Form 10-Q
Reporting period: Fiscal quarter and six months ended June 27, 2020, compared with June 29, 2019. Tractor Supply operated 2,061 stores in 49 states, including 1,881 Tractor Supply and Del’s stores and 180 Petsense stores. The company sells rural-lifestyle, agricultural, pet, seasonal, hardware, clothing, and related products through stores and e-commerce channels.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Net sales | $3.176 billion | $2.354 billion | +35.0% |
| Gross profit | $1.157 billion | $821 million | +41.0% |
| Gross margin | 36.42% | 34.87% | +155 bps |
| Operating income | $448 million | $288 million | +55.7% |
| Operating margin | 14.10% | 12.22% | +188 bps |
| Net income | $339 million | $219 million | +54.5% |
| Diluted EPS | $2.90 | $1.80 | +61.1% |
| Metric | Six months 2020 | Six months 2019 | Change |
|---|---|---|---|
| Net sales | $5.136 billion | $4.176 billion | +23.0% |
| Gross margin | 35.40% | 34.38% | +102 bps |
| Operating income | $560 million | $391 million | +43.3% |
| Net income | $422 million | $296 million | +42.7% |
| Diluted EPS | $3.61 | $2.43 | +48.6% |
| Net cash from operating activities | $993 million | $349 million | +$644 million |
Q2 comparable-store sales increased 30.5%, supported by a 15.8% increase in average transaction value and a 14.6% increase in transaction count. E-commerce sales grew at a triple-digit rate. Gross-margin expansion reflected fewer and less extensive promotions, favorable product mix, and lower transportation costs as a percentage of sales.
SG&A, including depreciation and amortization, increased 33.0% in Q2 but declined to 22.32% of sales from 22.65%, reflecting fixed-cost leverage. This benefit was partly offset by approximately $55 million of COVID-19-related costs and higher incentive compensation. Six-month COVID-19-related costs were approximately $62 million.
At June 27, 2020, cash and cash equivalents were $1.206 billion, working capital was $873 million, and total debt was $916 million net of unamortized issuance costs. Outstanding borrowings were $917.5 million, compared with $397.5 million at December 28, 2019 and $490.0 million at June 29, 2019. The company had $52.4 million of outstanding letters of credit and remained in compliance with its debt covenants.
Operating cash flow of $993 million substantially exceeded capital expenditures of $86.6 million. Financing activities provided $215 million, including $520 million of net debt borrowings, while the company paid $81.5 million in dividends and repurchased $263.2 million of common stock during the first six months. The share-repurchase program was suspended effective March 12, 2020.
Material changes versus the prior comparable period
- COVID-19-related demand drove broad-based sales growth, particularly in seasonal products and everyday consumable, usable, and edible products.
- Comparable-store sales growth accelerated to 30.5% in Q2 from 3.2% in Q2 2019.
- Gross margin, operating margin, net income, and diluted EPS all improved substantially.
- Cash from operations increased by $644 million, primarily due to higher earnings and favorable changes in inventory, accounts payable, accrued expenses, and income taxes.
- Debt increased materially due to a $200 million March 2020 term loan and a $350 million April 2020 term loan, both raised to strengthen liquidity during the pandemic.
- The company opened 38 Tractor Supply stores and three Petsense stores during the first six months, compared with 25 and two, respectively, in the prior-year period.
- The quarterly dividend remained $0.35 per share during the first half; after quarter-end, the board declared a $0.40 per-share dividend payable September 9, 2020.
Guidance, outlook, risks, and unusual items
- Management stated that Q3 demand was expected to remain strong but below the exceptional Q2 level. The filing does not provide a clear Q3 sales or earnings forecast.
- Fiscal 2020 effective tax rate guidance was 22.6% to 22.9%.
- Fiscal 2020 capital expenditure guidance was increased to approximately $300 million to $325 million from $225 million to $275 million.
- Management expected to open approximately 75 to 80 new Tractor Supply stores and approximately 10 new Petsense stores in fiscal 2020, although COVID-19 could delay openings.
- The company believed available cash, operating cash flow, debt capacity, leases, and trade credit would fund operations and capital needs through the end of fiscal 2020.
- COVID-19 risks include renewed store or distribution-center closures, workforce shortages, supply-chain disruption, higher labor and safety costs, changes in consumer behavior, reduced access to capital, and pressure on liquidity and financial flexibility.
- Permanent hourly wage increases of at least $1 per hour and expanded benefits for part-time store and distribution-center employees began June 28, 2020. These costs are expected to continue after the pandemic.
- Interest-rate swaps reduced exposure to variable-rate debt, but their fair value was a net liability of $8.5 million at June 27, 2020.
- Ordinary-course litigation was not expected to have a material adverse effect based on information available, although future outcomes remain uncertain.
Important facts for investors to verify
- Whether pandemic-driven demand and unusually high comparable-store sales can be sustained after stimulus effects and behavioral changes normalize.
- The impact of permanent wage and benefit increases, COVID-19 safety costs, incentive compensation, and other investments on future margins.
- Debt maturities and refinancing requirements, particularly the $350 million April 2020 term loan due April 2021 and other term loans due in 2022.
- Compliance with the fixed-charge coverage and leverage covenants as debt levels and operating conditions change.
- Inventory availability, supplier performance, transportation costs, and potential supply-chain disruptions.
- The timing and return on planned store openings, capital expenditures, technology investments, and omni-channel initiatives.
- Future decisions regarding dividends and the suspended $4.5 billion share-repurchase authorization, of which $1.22 billion remained available at quarter-end.