Tractor Supply Company — Fiscal Q1 2020 Form 10-Q Summary
Business context and reporting period
Tractor Supply Company is a rural lifestyle retailer operating Tractor Supply, Del’s, and Petsense stores, plus e-commerce channels. The unaudited quarter ended March 28, 2020 included 2,043 stores in 49 states, comprising 1,863 Tractor Supply and Del’s stores and 180 Petsense stores. Results were affected by the COVID-19 pandemic, particularly during the final three weeks of the quarter.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $1.959 billion | $1.822 billion | +7.5% |
| Comparable-store sales | +4.3% | +5.0% | Down 0.7 percentage points |
| Gross profit | $661.2 million | $615.0 million | +7.5% |
| Gross margin | 33.75% | 33.75% | Flat |
| Operating income | $112.5 million | $103.4 million | +8.8% |
| Operating margin | Approximately 5.7% | Approximately 5.7% | Broadly stable |
| Net income | $83.8 million | $76.8 million | +9.0% |
| Diluted EPS | $0.71 | $0.63 | +12.7% |
| Net cash from operations | $83.9 million | $(13.0) million | Improved by $96.9 million |
| Capital expenditures | $29.6 million | $28.8 million | +3.0% |
SG&A and depreciation increased 7.3% to $548.7 million, while related expenses declined slightly to 28.00% of sales from 28.07%. COVID-19-related costs were approximately $7 million in the quarter. The effective tax rate was 22.1%, compared with 22.0% in the prior-year quarter.
Cash and cash equivalents were $461.5 million at March 28, 2020, compared with $84.2 million at December 28, 2019 and $102.2 million at March 30, 2019. Working capital was $986.1 million. Inventory was $1.906 billion, supported by seasonal spring purchases and new-store growth.
Total outstanding borrowings were $1.020 billion at March 28, 2020, compared with $397.5 million at December 28, 2019 and $628.3 million at March 30, 2019. The increase included a $200 million March 2020 term loan and higher revolver borrowings. The Company was in compliance with its debt covenants. Outstanding letters of credit totaled $39.0 million.
Material changes versus the prior comparable period
- Sales growth was driven by comparable-store sales, new stores, strength in consumable, usable and edible products, and spring seasonal demand. Livestock and pet products increased to 54% of sales from 52%.
- Comparable average transaction value increased 5.4%, while comparable transaction count decreased 1.1%.
- Tractor Supply opened 20 stores in Q1 2020 versus 10 in Q1 2019; consolidated stores increased to 2,043 from 1,951.
- Operating cash flow improved substantially, primarily because of working-capital changes, including accounts payable and inventory timing.
- Share repurchases increased to $263.2 million from $155.3 million before the program was suspended on March 12, 2020. The Company repurchased 2.853 million shares during the quarter.
- Cash dividends declared increased to $0.35 per share from $0.31 per share.
- Interest-rate swap valuations moved to a net liability of $6.8 million from a net asset of $0.3 million at December 28, 2019, producing a $5.25 million after-tax other comprehensive loss.
Guidance, outlook, risks and unusual items
The Company withdrew its fiscal 2020 financial guidance on April 7, 2020 because of uncertainty surrounding COVID-19. Management estimated net incremental costs of operating as an essential retailer at $30 million to $50 million for Q2 2020. The Company stated that stores, distribution centers, and e-commerce operations were open and planned to remain open, but warned that the pandemic could materially affect sales, staffing, supply chains, expenses, liquidity, capital spending, and store-opening timing.
On April 22, 2020, after quarter-end, the Company amended its credit facility and entered into a $350 million unsecured incremental term loan maturing April 21, 2021. Management stated that available cash, operating cash flow, debt capacity, leases, and trade credit were expected to fund operations and capital expenditures through the end of fiscal 2020.
The Company suspended share repurchases to preserve liquidity but maintained its stated intention to continue quarterly dividends subject to Board approval. A $0.35 per share dividend was declared on May 6, 2020. Management continued to target approximately 80 new Tractor Supply stores and 10 new Petsense stores for fiscal 2020, although COVID-19 could delay openings. The filing identifies supply-chain disruption, facility closures, labor shortages, consumer-demand changes, increased operating costs, higher leverage, and reduced access to capital as principal risks.
Ordinary-course litigation was not expected to have a material adverse effect based on information available at filing, although future developments could produce material impacts. Recently adopted accounting standards did not materially affect the financial statements.
Important facts for investors to verify
- Whether COVID-19-related sales strength in consumables and pet products persisted after the quarter and offset weaker discretionary and seasonal categories.
- The actual Q2 and full-year impact of the estimated $30 million to $50 million in incremental COVID-19 costs.
- Post-quarter-end borrowing levels, liquidity availability, covenant compliance, and repayment requirements following the additional $350 million term loan.
- Whether and when share repurchases resume, and the effect of suspended repurchases on EPS and capital allocation.
- The timing and economics of planned store openings, capital expenditures, and omni-channel investments.
- Potential supply-chain, labor, regulatory, litigation, and interest-rate effects that could materially change future results.