Tractor Supply Company — 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, together with e-commerce channels. As of September 25, 2021, the company operated 2,144 stores in 49 states, including 1,967 Tractor Supply and Del’s stores and 177 Petsense stores. The filing covers the fiscal three and nine months ended September 25, 2021, compared with September 26, 2020. Financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $3.018 billion | $2.607 billion | $9.412 billion | $7.742 billion |
| Gross profit | $1.085 billion | $948.0 million | $3.357 billion | $2.766 billion |
| Gross margin | 36.0% | 36.4% | 35.7% | 35.8% |
| Operating income | $297.2 million | $252.2 million | $1.014 billion | $812.5 million |
| Net income | $224.4 million | $190.6 million | $775.8 million | $613.1 million |
| Diluted EPS | $1.95 | $1.62 | $6.68 | $5.23 |
| Dividends per share declared | $0.52 | $0.40 | $1.56 | $1.10 |
- Q3 sales increased 15.8%, comparable sales increased 13.1%, and e-commerce sales grew at a double-digit rate. Comparable transaction value increased 9.5% and transaction count increased 3.6%.
- For the first nine months, sales increased 21.6% and comparable sales increased 18.5%; comparable transaction value increased 9.7% and transaction count increased 8.8%.
- Q3 operating margin was approximately 9.8%, compared with 9.7% in the prior-year quarter. Nine-month operating margin was approximately 10.8%, compared with 10.5%.
- Q3 SG&A, including depreciation and amortization, was 26.1% of sales, down from 26.7%. Nine-month SG&A was 24.9%, down from 25.2%.
- Effective tax rates were 22.9% in Q3 2021 and 21.9% for the first nine months, compared with 22.2% and 22.6%, respectively, in the prior-year periods.
- Cash and cash equivalents were $1.112 billion at September 25, 2021. Working capital was $1.422 billion.
- Operating cash flow was $871.8 million for the first nine months, compared with $1.005 billion in the prior-year period. Capital expenditures were $382.4 million, compared with $161.3 million.
- Free cash flow, calculated as operating cash flow less capital expenditures, was approximately $489.5 million for the first nine months; this is a derived measure and is not separately presented by the company.
- Total outstanding borrowings were $1.000 billion, with $985.9 million of debt reported net of discounts and issuance costs. The company also had $46.5 million of outstanding letters of credit and approximately $500 million of undrawn revolving capacity, subject to applicable conditions.
Material changes versus the prior comparable period
- Q3 net income increased 17.7% and diluted EPS increased 20.4%; nine-month net income increased 26.5% and diluted EPS increased 27.7%.
- Gross margin declined 41 basis points in Q3 and seven basis points for the first nine months, primarily because of product-cost inflation, higher transportation costs and product mix. Price management, lower promotional activity and reduced clearance activity partially offset these pressures.
- SG&A leverage improved as comparable sales increased, occupancy and fixed costs were leveraged, and COVID-19 response costs declined. COVID-related costs were approximately $11.5 million in Q3 and $52.6 million for the first nine months, versus $20.3 million and $82.4 million, respectively, in the prior-year periods.
- Operating cash flow declined by $133.2 million year over year, primarily because inventory growth and related working-capital investment were greater relative to the prior-year period.
- Capital expenditures increased by $221.1 million, reflecting store remodels and improvements, technology investments and construction of the Navarre, Ohio distribution center.
- Financing activities used $720.6 million versus providing $182.9 million in the prior-year period, driven primarily by $598.0 million of share repurchases and $179.8 million of dividends. Prior-year financing cash flow benefited from pandemic-related borrowings.
- The company repurchased approximately 3.5 million shares for $598.0 million during the first nine months, compared with 2.9 million shares for $263.2 million in the prior-year period. Remaining repurchase authorization was $545.9 million.
Guidance, outlook, risks and unusual items
- Management expected full-year 2021 capital expenditures of approximately $550 million to $600 million, including approximately 80 new Tractor Supply stores, 10 new Petsense stores, store remodels, technology investments and the Navarre distribution center.
- Management expected the full-year 2021 effective tax rate to be between 22.1% and 22.3%.
- The company stated that existing cash, operating cash flow, debt-facility availability, leases and trade credit were expected to fund operations and capital needs through the end of fiscal 2021.
- The company agreed to acquire Orscheln Farm and Home for approximately $320 million in cash, subject to regulatory clearance and customary closing conditions. The proposed acquisition includes 167 stores in 11 states and was intended to be funded with cash on hand.
- The company was constructing a roughly 900,000-square-foot distribution center in Navarre, Ohio, expected to be completed by the end of fiscal 2022. Contractual commitments were approximately $93.8 million at September 25, 2021.
- Key risks include COVID-19 and related operating costs, inflation, transportation and supply-chain constraints, merchandise availability, labor and construction delays, consumer spending, weather and seasonality, competition from online retailers, foreign-supplier dependence, technology and cybersecurity risks, acquisition execution, litigation, regulatory changes and interest-rate exposure.
- The company remained in compliance with its debt covenants, including a minimum fixed-charge coverage ratio of 2.00 to 1.0 and a maximum leverage ratio of 4.00 to 1.0. Its interest-rate swap had a $200 million notional amount and matured in 2025.
- A derivative stockholder lawsuit alleging proxy and fiduciary-duty violations related to diversity and inclusion remained pending. The company disputed the allegations and did not believe the matter would materially affect its financial statements, although the ultimate outcome was not determinable.
- On November 3, 2021, the board declared a $0.52-per-share dividend payable December 8, 2021. Future dividends and repurchases remain subject to board discretion and financial conditions.
Most important facts for investors to verify
- Whether sales momentum and elevated comparable-store performance persist after pandemic-related demand and government stimulus effects moderate.
- Whether product-cost inflation, transportation costs, labor costs and supply-chain constraints further pressure gross margin.
- Progress, total cost and timing of the Navarre distribution center and the planned store-opening and remodel program.
- Regulatory clearance, closing timing, funding and expected benefits of the approximately $320 million Orscheln acquisition.
- Cash conversion and inventory management, given the year-over-year increase in inventory and decline in operating cash flow.
- Remaining share-repurchase authorization, capital-allocation priorities and compliance with debt covenants.
- Developments in the pending derivative litigation and the continuing operational and financial effects of COVID-19.